SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

FOR  ANNUAL AND  TRANSITION  REPORTS  PURSUANT  TO  SECTIONS  13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

                     For the fiscal year ended June 30, 2003

                         Commission File Number: 0-22423

                              HCB BANCSHARES, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

          Oklahoma                                             62-1670792
----------------------------                                ----------------
(State or Other Jurisdiction                                (I.R.S. Employer
of Incorporation or Organization)                         Identification No.)

  237 Jackson Street, Camden, Arkansas                       71701-3941
----------------------------------------                     ----------
(Address of Principal Executive Offices)                     (Zip Code)

       Registrant's telephone number, including area code: (870) 836-6841
                                                           --------------

         Securities registered pursuant to Section (b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------

                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES X  NO    .
                                             ---   ---

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). YES    NO X
                                        ---   ---

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant at August 31, 2003 was  approximately  $18,991,000  based on the
closing  sale  price of the  registrant's  Common  Stock as listed on the Nasdaq
SmallCap  MarketSM as of  December  31,  2002  ($16.00  per  share).  Solely for
purposes of this calculation,  directors, executive officers and greater than 5%
stockholders are treated as affiliates.

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest  practicable date:  1,450,230 shares of common
stock as of August 31, 2003.

                                       1
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

     The following lists the documents incorporated by reference and the Part of
the Form 10-K into which the document is incorporated:

1.   Portions of Annual  Report to  Stockholders  for the Fiscal Year Ended June
     30, 2003. (Parts II and IV)

2.   Portions of Proxy  Statement for the 2003 Annual  Meeting of  Stockholders.
     (Part III)




                                       2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS
-----------------

GENERAL

     HCB BANCSHARES,  INC. HCB Bancshares,  Inc. ("Bancshares") was incorporated
under the laws of the State of Oklahoma in December 1996 at the direction of the
Board of Directors of HEARTLAND  Community  Bank (the "Bank") for the purpose of
serving  as a  savings  institution  holding  company  of  the  Bank,  upon  the
acquisition  of all of the capital stock issued by the Bank upon its  conversion
from  mutual  to stock  form,  which  was  completed  on  April  30,  1997  (the
"Conversion").  The consolidated  financial  statements  include the accounts of
Bancshares and the Bank and are collectively  referred to as the "Company".  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

     Prior  to the  Conversion,  Bancshares  did  not  engage  in  any  material
operations. Since the Conversion, Bancshares has had no significant assets other
than the outstanding capital stock of the Bank, a portion of the net proceeds of
the  Conversion  and notes  receivable,  one of which is from the Employee Stock
Ownership Plan ("ESOP").  Bancshares  principal  business is the business of the
Bank.  At June 30,  2003,  the Company had  consolidated  total assets of $251.0
million,  deposits of $152.0 million and stockholders'  equity of $28.5 million,
or 11.3% of total assets.

     The holding company  structure  permits  Bancshares to expand the financial
services  currently  offered through the Bank. As a holding company,  Bancshares
has greater  flexibility  than the Bank to  diversify  its  business  activities
through existing or newly formed  subsidiaries or through  acquisition or merger
with other financial institutions. Bancshares is classified as a unitary savings
institution holding company and is subject to regulation by the Office of Thrift
Supervision ("OTS"). As long as Bancshares remains a unitary savings institution
holding  company,  under current law it can  diversify its  activities in such a
manner as to include any  activities  allowed by law or  regulation to a unitary
savings institution holding company. See "Regulation -- Regulation of Bancshares
-- Activities Restrictions."

     The Company's executive offices are located at 237 Jackson Street,  Camden,
Arkansas 71701-3941, and its telephone number is (870) 836-6841.

     HEARTLAND  COMMUNITY  BANK.  HEARTLAND  Community  Bank was  organized as a
federally  chartered  mutual savings and loan  association  named "First Federal
Savings and Loan  Association of Camden" ("First  Federal") in 1933, and in 1934
it became a member of the FHLB system and obtained federal deposit insurance. In
May 1996,  First Federal  acquired the former Heritage Bank, FSB, which retained
its separate  federal  savings  bank  charter and deposit  insurance as a wholly
owned subsidiary of First Federal (in order to facilitate possible future branch
expansion,  in the event the Bank ever  becomes  subject to  Arkansas  branching
restrictions,  which at that time were based on the home office location of each
separately  chartered banking  institution),  but whose business operations were
fully  integrated with those of First Federal.  In September 1996, First Federal
and Heritage  changed  their names to  HEARTLAND  Community  Bank and  HEARTLAND
Community Bank, F.S.B.,  respectively.  Then on February 23, 1998, the Bank sold
all of the  shares  of stock of  Heritage  Banc  Holding,  Inc.,  parent  of its
subsidiary savings bank,  HEARTLAND Community Bank, FSB ("FSB"),  pursuant to an
agreement  between  the Bank  and the Bank of the  Ozarks,  Inc.  ("BOO").  Upon
completion of the  transaction  and pursuant to the terms of the agreement,  the
Bank acquired the loans and certain other assets and non-deposit  liabilities of
the Little Rock,  Arkansas  branch of FSB and all assets and  liabilities of the
Monticello,  Arkansas branch and the Bryant,  Arkansas loan production office of
FSB and BOO  acquired the savings  deposits  and  premises and  equipment of the
Little Rock,  Arkansas  branch of FSB, as well as FSB's holding  company charter
and stock.  This transaction was substantively a branch sale. Also at such time,
Bancshares became a unitary rather than a multiple savings  institution  holding
company.

     On March 7, 2002, the Company announced that its bank subsidiary, HEARTLAND
Community  Bank had entered into a  definitive  Branch  Purchase and  Assumption
Agreement  with Simmons First Bank of South  Arkansas  ("SFB"),  a subsidiary of
Simmons First National  Corporation.  Pursuant to such agreement,  the Bank sold
its Monticello,  Arkansas branch office to SFB on July 19, 2002,  which included
approximately $8.3 million in loans,

                                       3
<PAGE>

$1.5 million in fixed assets, $0.2 million in other assets, and $13.2 million in
deposits.  The Bank recognized a premium on the deposits of  approximately  $0.9
million and the difference was paid in cash to the buyer.

     After the sale of the Monticello branch, the Bank has operated through five
full-service  banking  offices  located in Camden (2),  Fordyce,  Sheridan,  and
Bryant,  Arkansas.  Historically,  the principal  business strategy of the Bank,
like most other  savings  institutions  in Arkansas and  elsewhere,  has been to
accept savings  deposits from residents of the communities  served by the Bank's
branch  offices and to invest  those funds in  single-family  mortgage  loans to
those and other local  residents.  In this manner,  the Bank and countless other
independent  community-oriented savings institutions operated safely and soundly
for generations. Moreover, during this period the Bank's market area experienced
only limited economic growth.

     The Board of Directors of the Company  continually  seeks to maximize value
for all its stockholders.  In conjunction with that goal, the Board of Directors
has  recently  engaged in  strategic  planning  meetings to  consider  available
strategies for maximizing stockholder value including a sale of the Company. The
Board will  continue to explore  available  alternatives  and has  retained  the
services  of the  consulting  firm of Gerrish &  McCreary  PC to assist in these
matters.  The Company's current business  strategy,  as developed and adopted by
all of its  directors,  officers and employees,  incorporates  the following key
elements:  (i)  continuing  to provide the quality  service  that only a locally
based  institution and its dedicated staff can deliver,  (ii)  strengthening its
core deposit base,  decreasing  interest costs, and increasing fee income by the
effective  cross  selling  of  deposit  facilities  and  products;   and,  (iii)
maintaining loan yields and fee income while improving asset quality.  In recent
months, due to an increase in nonperforming loans, the Company has increased and
intensified  its  collection  efforts and  shortened  the time frames when these
collection efforts are put into action.

     As a  federally  chartered  savings  institution,  the Bank is  subject  to
extensive  regulation  by the OTS.  The  Bank's  lending  activities  and  other
investments must comply with various federal  regulatory  requirements,  and the
OTS  periodically  examines  the Bank for  compliance  with  various  regulatory
requirements.  The Federal Deposit Insurance  Corporation  ("FDIC") also has the
authority to conduct special  examinations.  The Bank must file reports with the
OTS describing  its  activities  and financial  condition and is also subject to
certain  reserve  requirements  promulgated  by the  Board of  Governors  of the
Federal Reserve System ("Federal Reserve Board").

FORWARD-LOOKING STATEMENTS

     When used in this Annual Report, the words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated,"  "estimate,"  "project" or
similar expressions are intended to identify "forward-looking statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
statements are subject to certain risks and  uncertainties  including changes in
economic  conditions  in the  Company's  market  area,  changes in  policies  by
regulatory  agencies,  fluctuations in interest  rates,  demand for loans in the
Company's market area, and competition that could cause actual results to differ
materially  from  historical   earnings  and  those  presently   anticipated  or
projected.  The Company wishes to caution readers not to place undue reliance on
any such forward-looking  statements,  which speak only as of the date made. The
Company  wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ  materially  from any opinions or statements  expressed
with respect to future periods in any current statements.

     The Company does not undertake,  and specifically disclaims any obligation,
to  publicly  release  the  result  of any  revisions  which  may be made to any
forward-looking  statements to reflect events or circumstances after the date of
such  statements or to reflect the occurrence of  anticipated  or  unanticipated
events.

MARKET AREA

     Management  considers  the  Bank's  primary  market  area to  comprise  the
following Counties in Arkansas: Calhoun, Cleveland,  Dallas, Grant, Ouachita and
Saline.  To a lesser extent,  the Bank accepts savings deposits and offers loans
throughout the remainder of central and southern Arkansas.

                                       4
<PAGE>

     The year 2000 census data indicated that the population  experienced growth
in  Cleveland  (10.2%),  Grant  (18.0%)  and  Saline  (30.1%)  Counties,   while
population  declined  somewhat in Calhoun  (-1.4%),  Dallas (-4.2%) and Ouachita
(-5.8%) Counties over the past ten years.  Median household income has been well
above the Arkansas  average in Saline,  Grant and Cleveland  Counties,  slightly
below the Arkansas average in Ouachita and Calhoun Counties,  and well below the
Arkansas  average in Dallas  County,  though the  Arkansas  average is below the
national average.  With respect to unemployment  rates, the Arkansas average has
tended to rise slightly above the national average, and while unemployment rates
have been well below the Arkansas average in Saline County,  unemployment  rates
have been moderately above the Arkansas average in Grant and Cleveland Counties,
and well above the Arkansas average in Calhoun, Dallas, and Ouachita Counties.

     The  economies  in the  Bank's  primary  market  area  include a variety of
industries,  including  manufacturing,  government,  services and retail  trade.
Important  employers include Georgia Pacific in the timber industry and Lockheed
Martin, Raytheon Missile Systems, and Atlantic Research in the defense industry,
Southern  Arkansas  University-Technical  College,  and Ouachita  Valley Medical
Center.  In  addition,  industries  in the Bryant  area  include  Bryant  School
District as the largest employer, with Alcoa as the largest industrial business,
and United Auto Group as the second largest employer.

COMPETITION

     The  Bank  experiences  substantial  competition  both  in  attracting  and
retaining  savings  deposits and in the originating of mortgage and other loans.
Direct  competition for savings deposits comes from other savings  institutions,
credit  unions,  and both  regional  and  local  commercial  banks.  Significant
competition for the Bank's other deposit  products and services comes from money
market mutual funds and brokerage  firms.  The primary  factors in competing for
loans are loan  products,  interest  rates and the quality of personal  service.
Competition  for  origination  of real estate  loans  normally  comes from other
savings institutions, commercial banks, credit unions and mortgage companies.

     The  Bank's  primary  competition  comes from  institutions  located in the
Bank's  primary  market  area.  Competing  financial  institutions  offer a wide
variety of deposit and loan products.  In recent years, as the banking  business
nationwide  and in the Bank's  primary market area in particular has become more
competitive, the Bank has come under increasing pressure. Management's principal
competitive strategy has been to emphasize quality customer service.

LENDING ACTIVITIES

     The Bank's principal  lending activity consists of the origination of loans
collateralized  by mortgages on existing and on  construction  of  single-family
residences in the Bank's primary  market area,  and  commercial  real estate and
multifamily  properties in the State of Arkansas.  The Bank also makes a variety
of consumer and commercial business loans.  Management expects to continue these
types of lending.

     With  certain  limited  exceptions,  the  maximum  amount  that  a  savings
institution may lend to any borrower  (including certain related entities of the
borrower) at one time may not exceed 15% of the  unimpaired  capital and surplus
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans  fully   collateralized   by  readily   marketable   collateral.   Savings
institutions are additionally  authorized to make loans to one borrower, for any
purpose, in an amount not to exceed $500,000 or, by order of the Director of the
OTS, in an amount not to exceed the lesser of  $30,000,000  or 30% of unimpaired
capital and surplus to develop residential housing,  provided:  (i) the purchase
price  of  each  single-family  dwelling  in the  development  does  not  exceed
$500,000;  (ii) the  institution is in compliance  with its  regulatory  capital
requirements; (iii) the loans comply with applicable loan-to-value requirements,
and;  (iv) the  aggregate  amount of loans made under  this  authority  does not
exceed 150% of  unimpaired  capital and surplus.  At June 30, 2003,  the maximum
aggregate amount that the Bank could have lent to any one borrower under the 15%
limit was approximately $3.7 million. At such date, the largest aggregate amount
of loans that the Bank had  outstanding  to any one borrower  was $2.8  million.
Bancshares may participate in loans to one borrower thereby  permitting loans to
one borrower to be made by the Bank and Bancshares  lending together that exceed
the Bank's  regulatory  loan limit.  At June 30, 2003, the Bank and  Bancshares'
loans to the borrower referred to above totaled  approximately  $3.1million with
Bancshares carrying $0.3 million of the loans.

                                       5
<PAGE>

     LOAN  PORTFOLIO  COMPOSITION.  The following  table sets forth  information
regarding the  composition  of the Bank's loan  portfolio by type of loan at the
dates  indicated.  At June 30,  2003,  the Bank had no  concentrations  of loans
exceeding 10% of gross loans other than as disclosed below.


<TABLE>
<CAPTION>
                                                                    June 30,
                        ----------------------------------------------------------------------------------------------------------
                                 2003                  2002                  2001                  2000                 1999
                        ------------------     ---------------      ------------------     -----------------      ---------------
                        Amount        %        Amount      %        Amount         %       Amount         %       Amount       %
                        ------      -----      ------    -----      ------       -----     ------        ---      ------      ---
<S>                    <C>          <C>       <C>        <C>       <C>           <C>      <C>          <C>       <C>          <C>
Type of Loan
------------
Real estate loans:
  One-to-four family
   residential        $ 42,450,596   38.52% $ 48,507,922  36.38%  $ 57,001,679   38.97% $ 61,198,180   42.26% $ 53,622,417  43.74%
  Multi-family loans     5,629,548    5.11     6,355,028   4.77      6,810,198    4.66     9,220,931    6.37     9,226,426   7.53
  Non-residential       29,668,812   26.92    41,334,937  31.00     49,736,511   34.01    48,756,744   33.67    41,907,368  34.18
  Land and other
    mortgage loans       8,088,129    7.34     8,602,412   6.45     10,080,790    6.89     5,644,050    3.90     3,547,514   2.89
Consumer loans:
  Loans secured by
    savings deposits     2,034,110    1.84     2,469,033   1.85      2,488,948    1.70     2,320,915    1.60     2,021,141   1.65
  Home improvement          40,444    0.04        35,310   0.03         23,611    0.02        40,851    0.03       125,990   0.10
  Auto                   4,102,692    3.72     6,836,399   5.13      6,779,218    4.64     6,589,480    4.55     4,269,898   3.48
  Other consumer         4,989,442    4.53     4,771,908   3.58      2,050,039    1.40     2,260,697    1.56     2,517,190   2.05
Commercial              13,207,629   11.98    14,406,499  10.81     11,289,519    7.71     8,769,131    6.06     5,367,611   4.38
                       -----------  ------   ----------- ------    -----------  ------   -----------  ------   ----------- ------
Total                 $110,211,402  100.00% $133,319,448 100.00%  $146,260,513  100.00% $144,800,979  100.00% $122,605,555 100.00%
                       -----------  ------   ----------- ------    -----------  ------   -----------  ------   ----------- ------

Less:
  Loans in process    $  7,910,521          $  7,663,698          $ 13,294,723          $  8,100,982          $  6,150,810
  Deferred loan costs
   (fees), net             (84,341)             (149,663)             (131,745)             (158,217)              (37,339)
  Allowance for loan
    losses               1,605,677             1,628,515             1,446,114             1,231,709             1,329,201
                       -----------           -----------           -----------           -----------           -----------
 Total                $100,779,545          $124,176,898          $131,651,421          $135,626,505          $115,162,883
                       ===========           ===========           ===========           ===========           ===========

</TABLE>

                                       6
<PAGE>

     LOAN  MATURITY  SCHEDULES.  The  following  table  sets  forth  information
regarding  dollar  amounts of loans  maturing in the Bank's  portfolio  based on
their  contractual  terms to maturity,  at June 30, 2003.  Demand  loans,  loans
having no stated  schedule of repayments  and no stated  maturity and overdrafts
are reported as due in one year or less. The table does not include any estimate
of  prepayments,  which  significantly  shorten the average life of all mortgage
loans and may cause the Bank's  repayment  experience  to differ from that shown
below.

<TABLE>
<CAPTION>
                                                        Due After
                                          Due Within   One Through     Due After
                                           One Year    Five Years     Five Years     Total
                                           --------    ----------     ----------     -----
                                                             (In thousands)
Real estate loans:
<S>                                       <C>           <C>            <C>          <C>
   One-to-four family mortgage loans...   $ 12,979      $  9,460       $ 20,012    $  42,451
   Other mortgage loans................      6,840        15,894         20,652       43,386
Commercial loans.......................      4,307         4,496          4,405       13,208
Consumer loans:
Loans secured by savings deposits......      1,561           473             --        2,034
Other.................................       1,344         5,106          2,682        9,132
                                           -------       -------        -------     --------
     Total.............................   $ 27,031      $ 35,429       $ 47,751    $ 110,211
                                           =======       =======        =======     ========
</TABLE>


     The following table sets forth as of June 30, 2003, dollar amounts of loans
due one year or more after June 30, 2003 that had  predetermined  interest rates
and that had adjustable interest rates at that date.

<TABLE>
<CAPTION>
                                                   Predetermined         Floating or
                                                      Rates            Adjustable Rates            Total
                                                      -----            ----------------            -----
                                                                        (In thousands)
Real estate loans:
<S>                                                 <C>                    <C>                  <C>
   One-to-four family mortgage loans.........       $  27,159              $   2,313            $  29,472
   Other mortgage loans......................          25,822                 10,724               36,546
Commercial loans.............................           8,409                    492                8,901
Consumer loans:
Loans secured by savings deposits............             473                     --                  473
Other consumer loans.........................           7,788                     --                7,788
                                                     --------               --------             --------
     Total...................................       $  69,651              $  13,529            $  83,180
                                                     ========               ========             ========
</TABLE>


     Scheduled  contractual  principal  repayments  of loans do not  reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Bank the right to declare a loan immediately due and
payable in the event,  among  other  things,  that the  borrower  sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage  loans tends to increase  when current  mortgage  loan market rates are
substantially  higher than rates on  existing  mortgage  loans and,  conversely,
decrease when current  mortgage loan market rates are  substantially  lower than
rates on existing mortgage loans.

                                       7
<PAGE>


     LOAN  ORIGINATIONS,  PURCHASES AND SALES.  The  following  table sets forth
information  regarding the Bank's loan originations,  purchases and sales during
the periods indicated.


                                               Year Ended June 30,
                                    ---------------------------------------
                                       2003          2002         2001
                                    -----------   -----------   -----------
Loans originated:
   Real estate loans:
   One-to-four family residential   $62,179,051   $42,880,138   $28,443,919
   Other mortgage loans .........    18,675,658    10,737,552    22,007,354
   Commercial loans .............     9,180,715    14,547,306     4,465,227
   Consumer loans ...............     9,034,787    11,231,892     9,659,572
                                    -----------   -----------   -----------
     Total loans originated .....   $99,070,211   $79,396,888   $64,576,072
                                    ===========   ===========   ===========

Loans purchased:
   Real estate loans ............   $        --   $        --   $    40,000
                                    ===========   ===========   ===========

Loans sold ......................   $33,795,154   $27,117,741   $12,732,692
                                    ===========   ===========   ===========


     The Bank has  maintained its scope of loan products  offered;  however with
the prevailing low interest rate environment and significant  competition,  loan
origination  efforts  have been  focused more on quality as opposed to quantity.
The table above  illustrates  that while the Bank  originated  a greater  dollar
amount of one-to-four family residential loans for the year ended June 30, 2003,
than either of the two previous fiscal years, a significantly  greater amount of
these loans were  originated for sale resulting in a net decrease in one-to-four
family loans. In addition,  the Bank originated a greater dollar amount of other
mortgage loans for the year ended June 30, 2003 than for the year ended June 30,
2002, however, due to increased competition and low interest rates,  prepayments
on these  types of loans were very high,  resulting  in an overall  decrease  in
other mortgage loans for the year.

     The  Bank  has  purchased   loans  from   established  and  reputable  loan
originators  from time to time to  supplement  the Bank's  internally  generated
originations. The Bank originates long term, fixed-rate,  single-family mortgage
loans and sells them to investors in the secondary  market.  Management  expects
the Bank to increase its origination of selected types of loans that do not meet
the Bank's  loan  portfolio  needs,  such as  long-term  fixed-rate  residential
mortgage loans for sale to investors.

     ONE-TO-FOUR FAMILY RESIDENTIAL LENDING.  Historically, the Bank's principal
lending  activity has been the  origination  of  fifteen-year  fixed-rate  first
mortgage  loans  in the  Bank's  primary  market  area.  The  purchase  price or
appraised  value of most of such  residences  generally has been between $50,000
and $200,000,  with the Bank's loan amounts averaging  approximately $90,000. At
June 30,  2003,  $42.5  million,  or  38.5%,  of the  Bank's  total  loans  were
collateralized by one-to-four family residences, substantially all of which were
existing, owner-occupied,  single-family residences in the Bank's primary market
area.

     While the Bank offers a variety of one-to-four family residential  mortgage
loans  with  fixed or  adjustable  interest  rates  and terms of up to 30 years,
substantially  all of the fixed-rate loans retained in the Bank's portfolio have
terms of 15 years or less.  Despite the relatively  low credit risks  associated
with the Bank's 30-year  one-to-four family portfolio loans, due to the interest
rate risks  associated  with such  longer term loans,  management  has  approved
shifting  the Bank's  one-to-four  family  residential  lending  emphasis in the
future  away from the  origination  of such loans for the Bank's  portfolio  and
toward  the  origination  of such  loans for sale.  Currently,  it is the Bank's
policy to originate all 30-year term  one-to-four  family  residential  loans in
accordance  with the  investor's  underwriting  guidelines  and to sell all such
originations promptly to investors,  servicing released.  Such loan originations
and  sales  have  become  significant.   One-to-four-family   residential  loans
originated  during the year totaled $62.2 million with $33.8 million or 54.4% of
originations sold or to be sold in the secondary market.  The Bank will continue
to make some non-conforming loans to be held in the Bank's portfolio. Management
expects to continue these policies in the future.

                                       8
<PAGE>

     With  respect  to  one-to-four  family  residential  loans  originated  for
retention in the Bank's portfolio,  the Bank's lending policies  generally limit
the maximum loan-to-value ratio to 90% for owner-occupied properties and 80% for
non-owner-occupied   properties.   Loans  originated   expressly  for  sale  are
originated in accordance with the lending policies and  underwriting  guidelines
of the investor.

     From time to time, the Bank makes loans to individuals for  construction of
one-to-four  family  owner-occupied  residences  located in the  Bank's  primary
market area,  with such loans  usually  converting to permanent  financing  upon
completion of construction. At June 30, 2003, the Bank's loan portfolio included
$4.3 million of loans  collateralized  by one-to-four  family  properties  under
construction,  some of which were  construction/permanent  loans  structured  to
become  permanent  loans upon the completion of  construction  and some of which
were interim  construction loans structured to be repaid in full upon completion
of construction and receipt of permanent  financing.  The Bank also offers loans
to qualified  builders for the  construction  of one-to-four  family  residences
located in the Bank's primary  market area.  Because such homes are intended for
resale, such loans are generally not covered by permanent financing  commitments
by the Bank. All construction  loans are  collateralized  by a first lien on the
property  under  construction.  Loan  proceeds are  disbursed in  increments  as
construction progresses and as inspections warrant. Construction/permanent loans
are  underwritten  in  accordance  with  the  same  requirements  as the  Bank's
permanent  mortgages,  except the loans  generally  provide for  disbursement in
stages during a  construction  period of up to nine months,  during which period
the borrower may be required to make monthly interest  payments.  Borrowers must
satisfy  all  credit  requirements  that  would  apply to the  Bank's  permanent
mortgage  loan  financing  prior to  receiving  construction  financing  for the
subject property.  Construction  financing  generally is considered to involve a
higher degree of risk of loss than  financing on existing  properties.  The Bank
has sought to minimize this risk by limiting  construction  lending to qualified
borrowers in the Bank's primary market area, and by requiring the involvement of
qualified builders.

     COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. The Bank offers commercial
and multi-family  real estate loans in order to benefit from the higher interest
rates than could be obtained from  investment  securities.  The Bank has offered
commercial and multi-family  loans for years and will continue to place emphasis
on the direct  origination  of commercial  and  multi-family  real estate loans,
particularly in central Arkansas.

     All commercial and multi-family loans above loan officers' approved lending
authorities  are reviewed and approved by the Bank's  lending  committees at the
headquarters  in Camden  prior to any  funding or the  issuance  of any  binding
commitment by the Bank.

     The Bank's  commercial real estate loans may be  collateralized by offices,
warehouses,  shopping centers,  land, nursing homes,  single-family  subdivision
developments and other income-producing and commercial properties.  Multi-family
real  estate  loans  are  collateralized  by  greater  than  one-to-four  family
residential  properties.  At June 30,  2003,  the Bank had 181  commercial  real
estate,  construction commercial real estate, land, and multi-family loans, with
an average loan balance of  approximately  $224,000.  At that date,  24 of these
loans  totaling  approximately  $6.2 million were  collateralized  by properties
outside  Arkansas,  and none of these  out-of-market  loans were  classified  by
management  as  substandard,  doubtful or loss or  designated  by  management as
special  mention.   Management   expects  the  Bank  to  continue  making  these
out-of-market loans from time to time as opportunities arise.

     The Bank's  commercial  and  multi-family  real estate loans  generally are
limited  to loans not  exceeding  $2,500,000  on  properties  located  either in
Arkansas or other  areas  selected by  management  and  approved by the Board of
Directors,  with terms of up to 20 years and loan-to-value  ratios of up to 80%.
Interest  rates may be fixed for up to 20 years.  Under  certain  circumstances,
these  longer-term  loans may be match funded with similar term FHLB advances to
reduce interest rate risk.

     Commercial  and  multi-family  real  estate  lending  entails   significant
additional  risks compared with  one-to-four  family  residential  lending.  For
example,  commercial and multi-family  real estate loans typically involve large
loan balances to single  borrowers or groups of related  borrowers,  the payment
experience on such loans  typically is dependent on the successful  operation of
the real estate project, and these risks can be significantly impacted by supply
and  demand  conditions  in the market for  multi-family  residential  units and
commercial  office,  retail and warehouse space.  These risks may be higher with
respect to loans  collateralized by properties outside the Bank's primary market
area or outside the Bank's most historically active lending areas.

                                       9
<PAGE>

     The  aggregate   amount  of  loans  which   federally   chartered   savings
institutions  may  make on the  security  of  liens on  commercial  real  estate
generally may not exceed 400% of the institution's capital.

     CONSUMER  LENDING.  The Bank's  consumer loans  primarily  consist of loans
collateralized  by savings  deposits at the Bank, and  automobiles.  These loans
totaled  $2.0  million  and  $4.1  million,  respectively,  at  June  30,  2003.
Management  plans to  continue  the  expansion  of the Bank's  consumer  lending
activities in the future as part of  management's  plan to provide a wider range
of financial services while increasing the Bank's portfolio yields and improving
its asset/liability management.

     The Bank makes  certificate  of deposit loans for up to 100% of the balance
of the  account.  The interest  rate on these loans  typically is fixed at least
three  percentage  points  above the rate paid on a deposit  at the Bank or four
percentage points above the rate paid on a deposit at another institution,  with
the maturity  and payment  frequency  matched to the terms of the  deposit.  The
account must be pledged as collateral to secure the loan.

     The Bank makes home  improvement  loans  collateralized  by the  borrower's
residence.  These loans,  combined with any higher priority mortgage loan, which
usually is from the Bank, generally are limited to 90% of the appraised value of
the residence.  Home  improvement  loans generally have fixed interest rates and
terms of up to ten years.

     The Bank's new and used  automobile  loans  generally are  underwritten  in
amounts  up to 80% of the  purchase  price,  dealer  cost or the  loan  value as
published  by the National  Automobile  Dealers  Association.  The terms of such
loans  generally  do not  exceed 60  months,  with  loans  for  older  used cars
underwritten  for shorter terms.  The Bank requires that the vehicles be insured
and that the Bank be listed as loss payee on the insurance policy.

     Consumer  loans  generally  involve  more risk than first  mortgage  loans.
Repossessed  collateral for a defaulted loan may not provide an adequate  source
of repayment  of the  outstanding  loan  balance as a result of damage,  loss or
depreciation  and the  remaining  deficiency  often  does  not  warrant  further
substantial   collection  efforts  against  the  borrower.  In  addition,   loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss,  divorce,  illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower  against the Bank,  and a borrower may be able to assert  against the
Bank  claims and  defenses  which it has  against  the seller of the  underlying
collateral.  In underwriting  consumer loans,  the Bank considers the borrower's
credit history,  an analysis of the borrower's  income,  expenses and ability to
repay the loan and the value of the collateral.

     COMMERCIAL  BUSINESS  LENDING.  The Bank currently  offers working  capital
loans and business  equipment  loans.  At June 30, 2003,  the Bank's  commercial
business  loans totaled  $13.2 million and primarily  consisted of inventory and
equipment loans.

     Commercial  business loans generally  involve more risk than  single-family
residential loans. In underwriting commercial business loans, the Bank considers
the obligor's credit history, an analysis of the obligor's income,  expenses and
ability to repay the obligation and the value of the collateral.

     LOAN SOLICITATION AND PROCESSING.  The Bank's loan originations are derived
from a number of sources, including referrals by realtors, builders, depositors,
borrowers  and  mortgage  brokers  as  well as  walk-in  customers.  The  Bank's
solicitation programs consist of calls by the Bank's officers, branch presidents
and  other  responsible  employees  to  local  realtors,  builders,   commercial
businesses,  and  advertisements  in local  newspapers  and billboards and radio
broadcasts. The Bank's loan officers, including corporate lending staff, as well
as branch presidents  originate loans. Loan applications are accepted at each of
the Bank's offices and,  depending on the loan type and amount, may be processed
and underwritten at the originating office or forwarded to the main office.

     Upon receipt of a loan application from a prospective borrower,  the Bank's
staff  preliminarily  reviews  the  information  provided  and makes an  initial
determination  regarding the qualification of the borrower.  If not disapproved,
the  application  then  is  placed  in  processing,  and  a  credit  report  and
verifications  are ordered to verify specific  information

                                       10
<PAGE>

relating to the loan applicant's  employment,  income and credit standing. It is
the Bank's policy to obtain an appraisal of the real estate intended to secure a
proposed mortgage loan from independent fee appraisers.  It is the Bank's policy
to  obtain  personal  guarantees  from the  principals  on all  loans.  The Bank
generally  does not obtain a formal  environmental  report on the real estate at
the  time a loan  is  made,  except  when a  particular  risk  of  environmental
contamination is suspected.

     It is the Bank's  policy to record a lien on the real estate  securing  the
loan and to obtain a title insurance policy that insures the property is free of
prior  encumbrances.  Borrowers must also obtain hazard insurance policies prior
to closing and,  when the property is in a  designated  flood plain,  paid flood
insurance policies.

     The Board of Directors  has the overall  responsibility  and  authority for
general  supervision  of the Bank's  loan  policies.  The Board has  established
written  lending  policies for the Bank. The Bank's officers and loan committees
approve  loans up to  specified  limits above which the approval of the Board is
required.  Loan applicants are promptly notified of the decision of the Bank. It
has been  management's  experience  that  substantially  all approved  loans are
funded.

     INTEREST  RATES  AND  LOAN  FEES.  Interest  rates  charged  by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
primary  market area and the Bank's  minimum yield  requirements.  Mortgage loan
rates reflect factors such as prevailing market interest rate levels, the supply
of money available to the savings industry and the demand for such loans.  These
factors  are in turn  affected  by general  economic  conditions,  the  monetary
policies of the federal  government,  including the Federal  Reserve Board,  the
general  supply of money in the economy,  tax policies and  governmental  budget
matters.

     The  Bank   receives  fees  in  connection   with  loan   commitments   and
originations,  loan  modifications,   late  payments  and  changes  of  property
ownership and for miscellaneous  services related to its loans. Loan origination
fees are calculated as a percentage of the loan principal.  The excess,  if any,
of loan  origination  fees over direct loan  origination  costs is deferred  and
accreted into income over the contractual life of the loan using the level yield
method.  If costs exceed fees,  the excess is deferred and  amortized to expense
over the loan's  contractual  life using the level  yield  method.  If a loan is
prepaid,  refinanced, or sold, all remaining deferred fees/costs with respect to
such loan are taken into income or recognized in expense at such time.

     COLLECTION POLICIES. When a borrower fails to make a payment on a loan, the
Bank  generally  takes prompt steps to have the  delinquency  cured and the loan
restored to current  status.  Once the payment grace period has expired (in most
instances 15 days after the due date),  a late notice is mailed to the borrower,
and a late  charge  is  imposed,  if  applicable.  If  payment  is not  promptly
received,  a second  notice is sent 15 days  after the  expiration  of the grace
period. If the loan becomes 30 days delinquent,  the borrower is contacted,  and
efforts are made to formulate an affirmative plan to cure the delinquency.  If a
loan becomes 60 days delinquent,  the loan is reviewed by the Bank's management,
and if payment is not made, management may pursue foreclosure,  repossession, or
other appropriate action. If a loan remains delinquent 90 days or more, the Bank
generally initiates foreclosure proceedings.

     ASSET  CLASSIFICATION;  ALLOWANCES  FOR  LOSSES AND  NONPERFORMING  ASSETS.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be  inadequately  protected by the current net worth and paying
capacity  of the  obligor  or of the  collateral  pledged,  if any.  An asset is
classified as doubtful if full collection is highly  questionable or improbable.
An asset is  classified  as loss if it is  considered  uncollectible,  even if a
partial  recovery could be expected in the future.  The regulations also provide
for a special  mention  designation,  described as assets which do not currently
expose an institution to a sufficient  degree of risk to warrant  classification
but  do  possess  credit   deficiencies   or  potential   weaknesses   deserving
management's  close  attention.  Assets  classified as  substandard  or doubtful
require an institution to establish  general  allowances for loan losses.  If an
asset or  portion  thereof  is  classified  loss,  an  institution  must  either
establish  a specific  allowance  for loss in the  amount of the  portion of the
asset classified loss, or charge off such amount. Federal examiners may disagree
with an institution's classifications.  If an institution does not agree with an
examiner's  classification of an asset, it may appeal this  determination to the
OTS Regional Director.

                                       11
<PAGE>

     Management  regularly reviews the Bank's assets to determine whether assets
require classification or re-classification,  and the Board of Directors reviews
and approves all classifications.  As of June 30, 2003, the Bank had $175,829 of
assets classified  doubtful,  $9,671,698 of assets classified  substandard,  and
$3,103,591 of assets  designated as special mention.  The Bank's total adversely
classified assets represented  approximately 3.9% of the Bank's total assets and
39.8% of the Bank's tangible  regulatory capital plus allowance for loan loss at
June 30, 2003. At June 30, 2003, management did not expect the Bank to incur any
loss  in  excess  of  attributable  existing  allowances  on any  of the  Bank's
adversely classified or designated assets.

     Management  also  reviews the loss  factors to  determine  whether they are
current and relevant.  Differences between estimated and actual losses have been
insignificant  for several  years.  However,  if the losses  experienced  change
significantly,  a determination  is made as to which factors  utilized should be
adjusted prospectively.

     Homogeneous   loans  are  those  that  are   considered   to  have   common
characteristics  that provide for evaluation on an aggregate or pool basis.  The
Company  considers the  characteristics  of (1) one-to-four  family  residential
first  mortgage  loans;  (2)  automobile   loans;  and  (3)  consumer  and  home
improvement  loans  to  permit  consideration  of  the  appropriateness  of  the
allowance  for  losses  of each  group  of loans on a pool  basis.  The  primary
methodology  used to determine the  appropriateness  of the allowance for losses
includes  segregating  certain specific,  poorly performing loans based on their
performance characteristics from the pools of loans as to type and then applying
a loss factor to the remaining pool balance based on several  factors  including
classification of the loans as to grade,  past loss experience,  inherent risks,
economic  conditions in the primary market areas and other factors which usually
are beyond the control of the Company.

     Non-homogeneous  loans are those loans that can be included in a particular
loan type,  such as  commercial  loans and  multi-family  and  commercial  first
mortgage  loans,  but which differ in other  characteristics  to the extent that
valuation  on a pool  basis is not valid.  After  segregating  specific,  poorly
performing  loans  and  applying  the  methodology  as  noted  in the  preceding
paragraph for such specific  loans,  the remaining  loans are evaluated based on
payment experience,  known difficulties in the borrower's business or geographic
area,  loss  experience,  inherent  risks and other factors  usually  beyond the
control of the  Company.  These  loans are then  graded  and a factor,  based on
experience, is applied to estimate the probable loss.

     In extending  credit,  the Bank  recognizes that losses will occur and that
the risk of loss will vary with,  among other  things,  the type of credit being
extended,  the  creditworthiness of the obligor over the term of the obligation,
general economic conditions and, in the case of a collateralized obligation, the
quality  of  the  security.  It is  management's  policy  to  maintain  adequate
allowances  for losses  based on  management's  assessment  of the  Bank's  loan
portfolio.  The Bank  increases its allowance for losses by charging  provisions
for losses  against the Bank's  income.  Federal  examiners may disagree with an
institution's allowance for losses and may require adjustment.

     The Bank's methodology for establishing the allowance for losses takes into
consideration  probable  losses that have been  identified  in  connection  with
specific  assets as well as  losses  that  have not been  identified  but can be
expected to occur.  Management conducts regular reviews of the Bank's assets and
evaluates  the  need to  establish  allowances  on the  basis  of  this  review.
Allowances are established by the Board of Directors on a regular basis based on
an  assessment  of risk in the  Bank's  assets  taking  into  consideration  the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss  experience,  the state of the real estate market,  regulatory  reviews
conducted in the regulatory examination process and current economic conditions.

     At the date of  foreclosure  or other  repossession,  the Bank  records the
property at fair value less  estimated  costs to sell.  Fair value is defined as
the  amount  in cash or  cash-equivalent  value  of other  consideration  that a
property  would yield in a current  sale  between a willing  buyer and a willing
seller.  Fair value is  measured  by market  transactions.  If a market does not
exist,  fair value of the  property  is  estimated  based on  selling  prices of
similar  properties  in active  markets  or, if there are no active  markets for
similar  properties,  by discounting a forecast of expected cash flows at a rate
commensurate with the risk involved.  Fair value generally is determined through
an appraisal  at the time of  foreclosure.  At June 30,  2003,  the Bank held no
properties  acquired in  settlement of loans for which  estimated  market values
were  unavailable.  Any amount of cost in excess of fair value at foreclosure is
charged-off  against the allowance for loan losses.  Subsequent to  acquisition,
the  property is  periodically  evaluated  by  management  and an  allowance  is
established

                                       12
<PAGE>

if the  estimated  fair value of the  property,  less  estimated  costs to sell,
declines.  If, upon ultimate  disposition  of the property,  net sales  proceeds
differ from the net carrying  value of the  property,  a gain or loss on sale of
real estate is recorded.

     The banking regulatory  agencies,  including the OTS, have adopted a policy
statement  regarding  maintenance  of an adequate  allowance  for loan and lease
losses and an effective loan review system.  This policy  includes an arithmetic
formula for checking the  reasonableness of an institution's  allowance for loan
loss  estimate  compared to the average  loss  experience  of the  industry as a
whole.

     Management actively monitors the Bank's asset quality and charges off loans
and properties acquired in settlement of loans against the allowances for losses
on such loans and such  properties when  appropriate and provides  specific loss
allowances  when  necessary.  Although  management  believes  it uses  the  best
information  available to make determinations with respect to the allowances for
losses,  future  adjustments  may be  necessary  if economic  conditions  differ
substantially from the economic conditions in the assumptions used in making the
determinations as to the appropriateness of the allowance.

     During the year ended June 30, 2003, in light of the Bank's loan  portfolio
review  and  changes  in the  mix of loan  types,  the  Bank  made  $533,000  in
provisions  for loan losses  bringing  the total  reserve  for losses  after net
charged-off  loans to $1.6  million,  or 1.46% of total loans which  compares to
1.22% as of June 30, 2002. The provision was made in consideration of reviews of
individual loans and the fact that nonperforming  loans as of June 30, 2003 as a
percent of total loans  increased  to 3.18% from 1.44% as of June 30,  2002.  In
addition,  total  classified  assets as a percent of the Bank's tangible capital
plus  allowance for loan loss was 39.8% as of June 30, 2003,  which  compares to
31.0% as of June 30,  2002.  As of June 30,  2003,  the Bank had $9.8 million in
assets classified substandard or doubtful as compared to $7.1 million as of June
30, 2002.

                                       13
<PAGE>

     The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated:

<TABLE>
<CAPTION>
                                                                 Year Ended June 30,
                                        ----------------------------------------------------------------
                                           2003          2002          2001         2000        1999
                                        ----------    ----------    ----------   ----------   ----------

<S>                                     <C>        <C>              <C>          <C>          <C>
Balance at beginning of period ......   $1,628,515 $   1,446,114    $1,231,709   $1,329,201   $1,468,546
                                        ----------    ----------    ----------   ----------   ----------

Loans charged-off:
  Real estate mortgage:
    One-to-four family residential ..      226,415         2,407        19,982        4,960       26,883
    Other mortgage loans ............      120,881            --            --           --           --
Commercial ..........................       66,412        77,500        25,811       50,047       37,742
Consumer ............................      239,260       154,475        55,968       44,791       79,632
                                        ----------    ----------    ----------   ----------   ----------
Total charge-offs ...................      652,968       234,382       101,761       99,798      144,257
                                        ----------    ----------    ----------   ----------   ----------

Recoveries:
  Real estate mortgage:
    One-to-four family residential ..       42,060         6,407         1,617           --          865
    Other mortgage loans ............           --            --            --           --           --
  Commercial ........................       17,243        57,357            --           --           --
  Consumer ..........................       37,827        23,019        18,549        2,306        4,047
                                        ----------    ----------    ----------   ----------   ----------
Total recoveries ....................       97,130        86,783        20,166        2,306        4,912
                                        ----------    ----------    ----------   ----------   ----------

Net loans charged-off ...............      555,838       147,599        81,595       97,492      139,345
                                        ----------    ----------    ----------   ----------   ----------

Provision for loan losses ...........      533,000       330,000       296,000           --           --
                                        ----------    ----------    ----------   ----------   ----------

Balance at end of period ............   $1,605,677 $   1,628,515    $1,446,114   $1,231,709   $1,329,201
                                        ==========    ==========    ==========   ==========   ==========

Ratio of net charge-offs to average
  loans outstanding during the period         0.51%         0.11%       0.06 %         0.08%        0.13%
                                        ==========    ==========    ==========   ==========   ==========
</TABLE>

                                       14
<PAGE>

The following table allocates the allowance for loan losses by asset category at
the dates  indicated.  The  allocation  of the allowance to each category is not
necessarily  indicative  of future  losses and does not  restrict the use of the
allowance to absorb losses in any category.


<TABLE>
<CAPTION>
                                                                    At June 30,
                                         ------------------------------------------------------------------
                                                 2003                2002                  2001
                                         ---------------------- --------------------- ---------------------
                                                    Percent of            Percent of            Percent of
                                                     Loans in              Loans in              Loans in
                                                    Category to           Category to           Category to
                                           Amount   Total Loans  Amount   Total Loans  Amount   Total Loans
                                           ------   -----------  ------   -----------  ------   -----------
Allocated to:
  Real estate loans:
<S>                                      <C>             <C>   <C>             <C>   <C>             <C>
  One-to-four family residential .....   $  361,958      38.5% $  321,538      36.4% $  480,460      39.0%
    Multi-family, non-residential, and
      land ...........................      880,988      39.4     998,653      42.2     570,261      45.6
  Consumer loans .....................      192,878      10.1     137,273      10.6      89,360       7.7
  Commercial loans ...................      169,853      12.0     171,051      10.8     255,662       7.7
  Unallocated ........................           --        --          --        --      50,371        --
                                         ----------     -----  ----------     -----  ----------     -----
         Total .......................   $1,605,677     100.0% $1,628,515     100.0% $1,446,114     100.0%
                                         ==========     =====  ==========     =====  ==========     =====


<CAPTION>
                                                        At June 30,
                                        ------------------------------------------------
                                                2000                   1999
                                        ------------------------ -----------------------
                                                     Percent of            Percent of
                                                      Loans in              Loans in
                                                     Category to           Category to
                                           Amount    Total Loans  Amount   Total Loans
Allocated to:
<S>                                     <C>             <C>   <C>             <C>
 Real estate loans:
 One-to-four family residential .....   $  440,709      42.3% $  422,000      43.7%
   Multi-family, non-residential, and      551,000      43.9     603,000      44.6
     land ...........................       91,000       7.7     101,000       7.3
 Consumer loans .....................      149,000       6.1      82,000       4.4
 Commercial loans ...................           --        --     121,201        --
 Unallocated ........................   ----------     -----  ----------     -----
                                        $1,231,709     100.0% $1,329,201     100.0%
        Total .......................   ==========     =====  ==========     =====

</TABLE>

                                       15
<PAGE>

     While  management  believes  the Bank has  established  its  existing  loss
allowances in accordance with generally accepted  accounting  principles,  there
can be no guarantee or assurance that such allowances are, or in the future will
be,  adequate to absorb all loan losses or that  regulators,  in  reviewing  the
Bank's assets, will not require the Bank to increase its loss allowance, thereby
negatively  affecting  the Bank's  reported  financial  condition and results of
operations.

     The  following  table sets  forth  information  with  respect to the Bank's
nonperforming  assets at the dates  indicated.  For  information  regarding  the
Bank's  interest  accrual  practices,  see the Notes to  Consolidated  Financial
Statements set forth in Item 8 herein.


<TABLE>
<CAPTION>
                                                                         At June 30
                                           --------------------------------------------------------------
                                              2003         2002         2001        2000        1999
                                           ----------   ----------   ----------   ----------   ----------

Loans accounted for on a nonaccrual
 basis: /1/
  Real estate:
<S>                                        <C>          <C>          <C>          <C>          <C>
    One-to-four family residential .....   $1,241,085   $1,176,095   $  838,271   $  655,988   $  462,205
    Other mortgage loans ...............    1,740,878        3,838           --           --       22,139
  Consumer loans .......................      287,925      188,824      137,987      102,003       81,648
  Commercial loans .....................      232,562      152,699           --           --           --
                                           ----------   ----------   ----------   ----------   ----------
    Total ..............................   $3,502,450   $1,521,456   $  976,258   $  757,991   $  565,992
                                           ==========   ==========   ==========   ==========   ==========

Accruing loans which are contractually
  past due 90 days or more:
   Real estate:
    One-to-four family residential .....   $       --   $  109,209   $   38,816   $  140,000   $       --
    Other mortgage loans ...............           --      251,333           --           --           --
  Commercial loans .....................           --           --      161,926           --           --
  Consumer loans .......................           --       35,953       13,400       21,524   $       --
                                           ----------   ----------   ----------   ----------   ----------
    Total ..............................   $       --   $  396,495   $  214,142   $  161,524   $       --
                                           ==========   ==========   ==========   ==========   ==========

    Total nonperforming loans ..........   $3,502,450   $1,917,951   $1,190,400   $  919,515   $  565,992
                                           ==========   ==========   ==========   ==========   ==========

Percentage of total loans...............         3.18%        1.44%        0.81%        0.64%        0.46%
                                           ==========   ==========   ==========   ==========   ==========
Other nonperforming assets /2/..........   $  246,160   $  623,114   $  175,783   $   52,919   $   20,289
                                           ==========   ==========   ==========   ==========   ==========
Loans modified in troubled debt
  restructurings .......................   $5,355,927   $4,678,247   $       --   $       --   $       --
                                           ==========   ==========   ==========   ==========   ==========

</TABLE>

----------
/1/  Designated   nonaccrual  loan  payments   received  are  applied  first  to
     contractual   principal  and  interest   income  is  recognized  only  when
     contractually current.
/2/  Other nonperforming assets includes foreclosed real estate.

     During the years ended June 30,  2003 and 2002,  gross  interest  income of
approximately $200,000 and $128,000,  respectively,  would have been recorded on
loans  accounted  for on a  nonaccrual  basis  if the  loans  had  been  current
throughout  the  respective  periods.  Interest on such loans included in income
during such respective  periods amounted to  approximately  $97,000 and $65,000,
respectively.

     Nonperforming   loans  increased  from  $1,917,951  on  June  30,  2002  to
$3,502,450 on June 30, 2003. Total nonperforming  one-to-four family residential
loans decreased slightly while total nonperforming consumer and commercial loans
increased.  The largest  increase in  nonperforming  loans was in other mortgage
loans,  which  increased  from  $255,171  on June 30,  2002,  to six  loans  for
$1,740,878 on June 30, 2003. This increase is primarily attributed one borrower,
which represents two loans totaling $1.3 million.  While these loans were placed
in nonaccrual  due to  delinquency,  management  does not expect any loss on the
loans due to them being very well collateralized.

                                       16
<PAGE>

     At June 30, 2003,  management had identified  approximately $4.0 million of
loans which amount is not reflected in the preceding table but as to where known
information  about possible  credit problems of borrowers  caused  management to
have  serious  doubts as to the  ability of such  borrowers  to comply  with the
present loan repayment  terms and which may result in future  disclosure of such
loans in the  table  above.  All of these  loans  were  included  in the  Bank's
adversely  classified  asset  amounts  as of June 30,  2003.  Of this  aggregate
amount,  approximately  $1,621,000 was  attributable  to 36  one-to-four  family
residential loans,  $326,000 was attributable to 5 commercial loans,  $1,628,000
was attributable to 13 other mortgage loans, and $439,000 was attributable to 43
consumer  loans.  At June 30, 2003,  management did not expect the Bank to incur
any loss in excess of  attributable  existing  allowances  on any of the  Bank's
assets.

INVESTMENT ACTIVITIES

     GENERAL.   The  Bank  is  permitted  under  federal  law  to  make  certain
investments,  including  investments  in  securities  issued by various  federal
agencies and state and municipal  governments,  savings  deposits at the FHLB of
Dallas,  certificates  of deposit in  federally  insured  institutions,  certain
bankers'  acceptances and federal funds. It may also invest,  subject to certain
limitations,   in   commercial   paper   rated   in  one  of  the  two   highest
investment-rating  categories of a nationally  recognized  credit rating agency,
and certain other types of corporate debt  securities and mutual funds.  Federal
regulations  require  the Bank to maintain  an  investment  in FHLB stock and to
maintain  a  sufficient  level of  liquidity.  The Bank has  chosen to fulfill a
portion of this requirement by investing in securities which provide liquidity.

     The Bank  makes  investments  in order to  maintain a  sufficient  level of
liquid  assets as  required  by  regulatory  authorities  and manage  cash flow,
diversify  its assets,  obtain yield and,  under prior  federal  income tax law,
satisfy  certain  requirements  for  favorable  tax  treatment.  The  investment
activities  of the Bank consist  primarily  of  investments  in  mortgage-backed
securities and other investment  securities,  consisting primarily of securities
issued or  guaranteed by the U.S.  government or agencies  thereof and state and
municipal  securities.  Typical  investments  include federally sponsored agency
mortgage  pass-through  and  federally  sponsored  agency  and  mortgage-related
securities.  Investment and aggregate investment  limitations and credit quality
parameters of each class of investment are  prescribed in the Bank's  investment
policy.  The Bank performs  analyses on  securities  prior to purchase and on an
ongoing basis to determine the impact on earnings and market value under various
interest rate and prepayment  conditions.  Securities  purchases are approved by
the  Bank's  Investment  Committee,  and the  Board  of  Directors  reviews  all
securities transactions on a monthly basis.

     Securities designated as "held to maturity" are those assets which the Bank
has the  ability  and  intent  to hold  to  maturity.  The  "held  to  maturity"
investment  portfolio is carried at amortized  cost.  Securities  designated  as
"available  for sale" are those assets which the Bank might not hold to maturity
and thus are carried at market value with unrealized gains or losses, net of tax
effect, recognized in stockholders' equity.

     Mortgage-backed  securities  typically  represent  an interest in a pool of
fixed-rate  or  adjustable-rate  mortgage  loans,  the  principal  and  interest
payments on which are passed from the mortgage  borrowers  to investors  such as
the  Bank.  Mortgage-backed  security  sponsors  may  be  private  companies  or
quasi-governmental  agencies such as FHLMC,  FNMA and GNMA,  which guarantee the
payment of principal and interest to investors.  Mortgage-backed  securities can
represent  a  proportionate  participation  interest  in a  pool  of  loans  or,
alternatively,  an obligation to repay a specified  amount  collateralized  by a
pool of loans (commonly referred to as a "collateralized  mortgage  obligation,"
or "CMO").  Mortgage-backed  securities  generally  increase  the quality of the
Bank's assets by virtue of the credit enhancements that back them. They are more
liquid  than  individual  mortgage  loans  and  may  be  used  to  collateralize
borrowings  or  other  obligations  of  the  Bank.  The  Bank's  mortgage-backed
securities  portfolio primarily consists of seasoned securities either issued by
one of the quasi-governmental agencies or rated in one of the top two categories
by a recognized rating organization.

     All of the Bank's privately issued  securities were rated "AA" or higher by
a nationally recognized credit rating agency at the time of purchase. Management
regularly  monitors  the  ratings of the Bank's  privately  issued  holdings  by
reference to nationally  published  rating media and by  communication  with the
issuer when  necessary.  At June 30, 2003, no privately  issued  securities were
rated below AA except as follows:


                                       17
<PAGE>

          A Citicorp  Mortgage,  Inc. REMIC Pass-Through Class A Certificate was
     rated "CAA1" by Moody. The grade reflects  deterioration in the performance
     of the mortgage pools  underlying the security.  At June 30, 2003, the Bank
     estimated the value of the security at approximately  $29,000 less than its
     face value.  The Bank's  carrying  value for this security at that date was
     approximately $83,000 after recognition of impairment loss.

          A DLJ Mortgage Acceptance Corp. Pass-Through Class A-3 Certificate was
     rated "CAA2" by Moody. The grade reflects  deterioration in the performance
     of the mortgage  pools  underlying  the security.  As of June 30, 2003, the
     deterioration affected the credit support and not the principal or interest
     of the security  itself.  At June 30, 2003, the Bank estimated the value of
     the security at approximately  $54,000 less than its face value. The Bank's
     carrying  value for this  security at that date was  approximately  $94,000
     after recognition of impairment loss.

     The Bank's privately issued mortgage  securities  consist of collateralized
mortgage obligations (CMOs) and mortgage  pass-through  securities.  At June 30,
2003, all of the privately  issued mortgage  securities had adjustable  interest
rates with a weighted average yield of 5.19% and a weighted  contractual average
term to maturity of 19.1  years.  The  carrying  value of the  privately  issued
mortgage  securities was approximately  $561,000 or 0.60% of the mortgage-backed
securities  and  CMOs  at  that  date.  None of the  privately  issued  mortgage
securities are insured or guaranteed by FHLMC or FNMA.

     The actual maturity of a mortgage-backed security varies, depending on when
the  mortgagors  prepay or repay the  underlying  mortgages.  Prepayments of the
underlying  mortgages may shorten the life of the investment,  thereby adversely
affecting   its  yield  to  maturity  and  the  related   market  value  of  the
mortgage-backed  security.  The yield is based upon the interest  income and the
amortization  of the  premium  or  accretion  of  the  discount  related  to the
mortgage-backed security.  Premiums and discounts on mortgage-backed  securities
are  amortized or accreted  over the estimated  term of the  securities  using a
level  yield  method.   The  prepayment   assumptions   used  to  determine  the
amortization  period for premiums and  discounts  can  significantly  affect the
yield of the  mortgage-backed  security,  and  these  assumptions  are  reviewed
periodically  to reflect the actual  prepayment.  The actual  prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon  rate,  the  age of  the  mortgages,  the  geographical  location  of the
underlying  real estate  collateralizing  the  mortgages  and general  levels of
market  interest  rates.  The  difference  between  the  interest  rates  on the
underlying  mortgages and the prevailing mortgage interest rates is an important
determinant  in the rate of  prepayments.  During  periods of  falling  mortgage
interest rates, prepayments generally increase, and, conversely,  during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying  mortgage  significantly  exceeds the  prevailing  market
interest rates offered for mortgage loans,  refinancing  generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

     The following table sets forth information regarding carrying values of the
Company's investment securities at the dates indicated.  All securities are held
as available for sale. At June 30,

<TABLE>
<CAPTION>
                                                 2003          2002          2001
                                            ------------   ------------   ------------
<S>                                           <C>            <C>            <C>
Securities available for sale:
   U.S. government and agencies .........   $         --   $  1,530,945   $  1,900,448
   Municipal securities .................     26,463,922     25,689,191     30,197,186
   Other securities .....................      1,980,000      1,995,000             --
   Collateralized mortgage obligations...     25,247,609     11,310,152     12,159,483
   Other mortgage-backed securities .....     76,160,245     77,603,036     75,784,260
   Equity securities ....................        108,570         70,240         40,800
                                            ------------   ------------   ------------
                                            $129,960,346   $118,198,564   $120,082,177
                                            ============   ============   ============
</TABLE>

                                       18
<PAGE>


     The following table sets forth information  regarding scheduled  maturities
of the  Company's  investment  portfolio at June 30,  2003.  Yields on municipal
securities are not tax-effected.


<TABLE>
<CAPTION>
                                 One Year or Less       One to Five Years       Five to Ten Years
                               -------------------    --------------------    --------------------
                               Carrying    Average    Carrying    Average     Carrying    Average
                                 Value      Yield      Value       Yield       Value      Yield
                                 -----      -----      -----       -----       -----      -----
<S>                              <C>       <C>       <C>          <C>       <C>           <C>
Municipal securities            $   --       --%    $       --      --%    $        --      --%
Other securities                    --       --             --      --              --      --
Collateralized mortgage
   obligations                      --       --             --      --       4,453,119    5.58
Other mortgage-backed
 securities                      1,646     7.23      2,473,352    6.18      12,915,530    3.84
                                ------     ----     ----------    ----     -----------    ----
   Total                        $1,646     7.23%    $2,473,352    6.18%    $17,368,649    4.29%
                                ======     ====     ==========    ====     ===========    ====
   Equity securities







<CAPTION>
                                     More than Ten Years          Total Investment Portfolio
                                   ---------------------      -----------------------------------
                                   Carrying      Average      Carrying       Market       Average
                                   Value          Yield        Value          Value        Yield
                                   -----          -----        -----          -----        -----


<S>                              <C>               <C>       <C>            <C>             <C>
Municipal securities             $ 26,463,922      5.00      26,463,922     26,463,922      5.00
Other securities                    1,980,000      2.30       1,980,000      1,980,000      2.30
Collateralized mortgage
   obligations                     20,794,490      3.95      25,247,609     25,247,609      4.24
Other mortgage-backed
 securities                        60,769,717      5.03      76,160,245     76,160,245      4.86
                                 ------------      ----    ------------   ------------      ----
   Total                         $110,008,129      4.77%   $129,851,776   $129,851,776      4.69%
                                 ============      ====                                     ====
   Equity securities                                            108,570        108,570
                                                           ------------   ------------
                                                           $129,960,346   $129,960,346
                                                           ============   ============

</TABLE>


                                       19
<PAGE>

DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS

     GENERAL.  Deposits are the primary  source of the Bank's funds for lending,
investment  activities and general  operational  purposes.  While the Bank, like
most independent savings  institutions,  historically has relied on certificates
of  deposit  for a  substantial  portion of its  deposit  base,  management  has
recently shifted the Bank's deposit gathering emphasis away from certificates of
deposit and toward  transaction  accounts with more  favorable  interest  costs,
interest rate risk  characteristics  and  opportunities  for the Bank to perform
valued customer services that generate additional fee income, and it is expected
that management will continue this trend in the future. In addition to deposits,
the Bank derives funds from loan principal and interest  repayments,  maturities
of investment securities and interest payments thereon. Although loan repayments
are a  relatively  stable  source of funds,  deposit  inflows and  outflows  are
significantly  influenced by general interest rates and money market conditions.
Borrowings  may be used to  compensate  for  reductions in the  availability  of
funds, or for general operational purposes. The Bank has access to advances from
the FHLB of Dallas.

     DEPOSITS.  The Bank attracts  deposits  principally from within its primary
market area by offering competitive rates on its deposit instruments,  including
NOW accounts,  money market accounts,  statement  savings  accounts,  Individual
Retirement  Accounts and certificates of deposit which range in maturity from 90
days to three  years.  Deposit  terms  vary  according  to the  minimum  balance
required,  the length of time the funds must remain on deposit and the  interest
rate. The Bank on a periodic basis establishes  maturities,  terms, service fees
and  withdrawal   penalties  for  its  deposit  accounts.   In  determining  the
characteristics of its deposit accounts, the Bank considers the rates offered by
competing  institutions,  lending and liquidity  requirements,  growth goals and
federal regulations. The Bank does not typically accept brokered deposits or pay
negotiated rates for jumbo certificates of deposits.

     The Bank  attempts to compete for deposits with other  institutions  in its
market  area by  offering  competitively  priced  deposit  instruments  that are
tailored  to the needs of its  customers.  Additionally,  the Bank seeks to meet
customers'  needs by providing  convenient  customer  service to the  community,
efficient staff and convenient hours of service. Substantially all of the Bank's
depositors are Arkansas residents who reside in the Bank's primary market area.

     The  following  table sets  forth  information  regarding  interest-bearing
average deposit balances and rates during the periods presented.


<TABLE>
<CAPTION>
                                                          Year Ended June 30,
                                   ---------------------------------------------------------------------
                                            2003                    2002                  2001
                                   ---------------------    -------------------    ---------------------
                                     Average    Average      Average    Average    Average    Average
                                     Balance      Rate       Balance     Rate      Balance     Rate
                                     -------    --------     -------   --------    -------    ---------

<S>                                <C>            <C>     <C>            <C>     <C>            <C>
NOW accounts ...................   $ 30,223,526   1.49%   $ 30,164,006   1.87%   $ 25,799,621   4.34%
Money market savings deposits...      5,034,371   1.01       6,191,033   1.90       6,967,070   3.72
Savings deposits - statement....      7,485,563   1.04       7,211,717   1.54       6,774,023   2.43
Certificates of deposit ........    100,545,473   3.18     112,568,794   4.36     106,806,416   5.76
                                   ------------   ----    ------------   ----    ------------   ----
    Total ......................   $143,288,933   2.63%   $156,135,550   3.65%   $146,347,130   5.26%
                                   ============   ====    ============   ====    ============   ====
</TABLE>

                                       20
<PAGE>

     The  following  table sets forth  information  regarding  changes in dollar
amounts of deposits in various types of accounts offered by the Bank between the
dates indicated.


<TABLE>
<CAPTION>
                                     Balance at                                   Balance at
                                      June 30,       % of         Increase         June 30,     % of         Increase
                                       2003         Deposits     (Decrease)          2002      Deposits      (Decrease)
                                       ----         --------     ----------          ----      --------      ----------
<S>                                <C>                <C>     <C>               <C>                <C>     <C>
Noninterest bearing deposits ....  $   9,447,561      6.22%   $      557,694    $   8,889,867      5.39%   $   1,509,975
NOW accounts ....................     33,360,141     21.95         3,157,598       30,202,543     18.30         (472,885)
Money market savings deposits ...      4,751,127      3.13        (1,160,588)       5,911,715      3.58          177,850
Savings deposits - statement ....      7,927,966      5.22           (83,007)       8,010,973      4.85        1,107,937
Certificates of deposit .........     96,469,709     63.48       (15,520,376)     111,990,085     67.88        1,397,127
                                   -------------    ------     -------------    -------------    ------    -------------
                                   $ 151,956,504    100.00%    $ (13,048,679)   $ 165,005,183    100.00%   $   3,720,004
                                   =============    ======     =============    =============    ======    =============

<CAPTION>
                                       Balance at
                                        June 30,       % of
                                          2001        Deposits
                                          ----        --------
<S>                                  <C>                <C>
Noninterest bearing deposits ....    $   7,379,892      4.58%
NOW accounts ....................       30,675,428     19.02
Money market savings deposits ...        5,733,865      3.56
Savings deposits - statement ....        6,903,036      4.28
Certificates of deposit .........      110,592,958     68.56
                                     -------------    ------
                                     $ 161,285,179    100.00%
                                     =============    ======

</TABLE>

                                       21
<PAGE>

     The  following  table  sets forth  information  regarding  certificates  of
deposits classified by rates at the dates indicated.

                                        At June 30,
                         ------------------------------------------
                            2003            2002          2001
                         ------------   ------------   ------------
0.75 - 2.99% .......     $ 50,099,367   $ 32,873,143   $         --
3.00 - 4.99% .......       40,723,104     61,567,322     33,036,565
5.00 - 7.99% .......        5,647,238     17,549,620     77,556,393
                         ------------   ------------   ------------
                         $ 96,469,709   $111,990,085   $110,592,958
                         ============   ============   ============

     The following table sets forth information regarding amounts and maturities
of certificates of deposits at June 30, 2003.

                           Balance Maturing 12-Months Ending June 30,
                     ----------------------------------------------------
Rate                     2004          2005         2006          Total
----                 -----------   -----------   -----------   -----------

0.75 - 2.99% ....    $46,592,917   $ 3,348,991   $   157,459   $50,099,367
3.00 - 4.99% ....     24,626,508    13,182,753     2,913,843    40,723,104
5.00 - 7.99% ....      5,153,457       493,781            --     5,647,238
                     -----------   -----------   -----------   -----------
                     $76,372,882   $17,025,525   $ 3,071,302   $96,469,709
                     ===========   ===========   ===========   ===========

     The  following   table  sets  forth   information   regarding   amounts  of
certificates  of deposit of $100,000 or more by time remaining until maturity at
June 30, 2003.

                                                     Certificates
                            Maturity Period           of Deposit
                            ---------------           ----------

                  Three months or less ...........   $ 3,877,002
                  Over three through six months...     4,893,717
                  Over six through 12 months .....     5,266,896
                  Over 12 months .................     3,145,294
                                                     -----------
                      Total ......................   $17,182,909
                                                     ===========

     The following table sets forth information  regarding deposit activities of
the Bank for the periods indicated.

                                           Year Ended June 30,
                                 --------------------------------------------
                                     2003            2002             2001
                                 ------------    ------------    ------------
Net (decrease) increase before
   interest credited .........   $(16,134,036)   $   (831,186)   $ 10,433,478
Interest credited ............      3,085,357       4,551,190       5,978,630
                                 ------------    ------------    ------------
   Net (decrease) increase in
     deposits ................   $(13,048,679)   $  3,720,004    $ 16,412,108
                                 ============    ============    ============


                                       22
<PAGE>

     BORROWINGS. Deposits historically have been the primary source of funds for
the Bank's lending,  investments and general operating  activities.  The Bank is
authorized,  however,  to use advances from the FHLB of Dallas to supplement its
supply of lendable funds and to meet deposit withdrawal  requirements.  The FHLB
of Dallas  functions  as a central  reserve  bank  providing  credit for savings
institutions and certain other member financial institutions. As a member of the
FHLB  System,  the Bank is  required  to own stock in the FHLB of Dallas  and is
authorized  to apply for  advances.  Advances are pursuant to several  different
programs, each with its own interest rate and range of maturities. Advances from
the FHLB of Dallas are collateralized by the Bank's stock in the FHLB of Dallas,
qualifying first mortgage loans and mortgage-backed investment securities.


                                       23
<PAGE>

     The following table sets forth certain information  regarding borrowings by
the Bank for the periods indicated.  Averages are based on monthly balances. See
the Notes to Consolidated Financial Statements set forth in item 8 herein.

<TABLE>
<CAPTION>
                                                           Year Ended June 30,
                                                 --------------------------------------------
                                                   2003            2002              2001
                                                 ----------      ----------       -----------

Amounts outstanding at end of period:
<S>                                              <C>             <C>             <C>
  FHLB advances ..............................   $ 69,068,534    $ 82,263,936    $ 91,915,694
  Weighted average rate ......................           5.96%           5.93%           5.88%

Maximum amount of borrowings
 outstanding at any month end:
  FHLB advances ..............................   $ 80,164,637    $ 91,831,310    $114,694,903

Approximate average borrowings during the year
 outstanding with respect to:
  FHLB advances ..............................   $ 74,823,968    $ 86,442,890    $105,619,861
  Weighted average rate ......................           5.95%           5.92%           6.03%
</TABLE>

SUBSIDIARY ACTIVITIES

     As a federally  chartered  savings bank, the Bank is permitted to invest an
amount equal to 2% of its assets in non-savings  institution service corporation
subsidiaries,  with  an  additional  investment  of  1%  of  assets  where  such
investment  serves  primarily  community,  inner-city and community  development
purposes.  Under such limitations,  as of June 30, 2003, on a consolidated basis
the Bank was authorized to invest up to approximately  $7.5 million in the stock
of or loans to such  subsidiaries,  including the  additional 1% investment  for
community,  inner-city  and  community  development  purposes.  The Bank has one
subsidiary service corporation, HCB Properties, Inc., which was formed in August
1996 to hold  certain  properties  acquired  by the  Bank  for  possible  future
expansion,  because  the  properties  are  larger  than the  Bank's  anticipated
expansion needs,  and it is expected that portions of the properties  eventually
will be sold. At June 30, 2003,  the Bank's  aggregate  investment in, and loans
to, the subsidiary service corporation totaled $261,740.


                                       24
<PAGE>

REGULATION OF THE BANK

     GENERAL.  As a federally  chartered savings institution the Bank is subject
to extensive regulation by the OTS and the FDIC and to OTS regulations governing
such matters as capital  standards,  mergers,  establishment  of branch offices,
subsidiary investments and activities and general investment authority.  The OTS
periodically   examines  the  Bank  for  compliance   with  various   regulatory
requirements. The FDIC also has the authority to conduct special examinations of
the Bank  because its savings  deposits  are insured by the SAIF.  The Bank must
file reports with the OTS describing its activities and financial  condition and
also is subject to  certain  reserve  requirements  promulgated  by the  Federal
Reserve Board.  This  supervision  and regulation is intended  primarily for the
protection of depositors.

     FEDERAL  HOME LOAN BANK  SYSTEM.  The Bank is a member of the FHLB  System,
which consists of 12 district  FHLB's  subject to supervision  and regulation by
the Federal Housing Finance Board ("FHFB").  The FHLB's provide a central credit
facility primarily for member  institutions.  As a member of the FHLB of Dallas,
the Bank is required to acquire and hold shares of capital  stock in the FHLB of
Dallas in an amount at least equal to 1% of the  aggregate  unpaid  principal of
its home mortgage loans, home purchase contracts and similar  obligations at the
beginning of each year,  or 1/20 of its advances  (borrowings)  from the FHLB of
Dallas, whichever is greater.

     The  Gramm-Leach-Bliley  Act of 1999  required  each  FHLB to  replace  its
existing  capital stock with a new class or classes of capital stock,  establish
new minimum investment requirements for its members, and comply with new minimum
leverage and risk-based capital requirements. The Bank is a member of the Dallas
FHLB,  which  currently  plans to implement its new capital plan on September 2,
2003.

     The new  minimum  investment  requirement  states  that  each  member  must
maintain an  investment  in new Class B Stock  equal to the sum of a  membership
investment  requirement  (0.20% of the member's  total assets as of the previous
December 31), and an activity-based  investment  requirement (4.25% of currently
outstanding  advances  and  certain new  Mortgage  Partnership  Finance  Program
loans).  As of June 30,  2003,  the Bank is  estimated  to have a capital  stock
requirement  of $3.4  million,  well  below its  capital  stock  balance of $4.7
million as of the same date.

     The FHLB of Dallas  serves  as a reserve  or  central  bank for its  member
institutions within its assigned district.  It is funded primarily from proceeds
derived from the sale of consolidated  obligations of the FHLB System.  It makes
advances to members in accordance  with policies and  procedures  established by
the FHLB and the Board of  Directors of the FHLB of Dallas.  Long-term  advances
may only be made for the  purpose of  providing  funds for  residential  housing
finance and small businesses, small farms and small agri-businesses. At June 30,
2003,  the Bank had  $69.1  million  in  advances  outstanding  with the FHLB of
Dallas. See " -- Deposit Activity and Other Sources of Funds -- Borrowings."

     QUALIFIED  THRIFT LENDER TEST. The Bank is subject to OTS regulations  that
use the  concept of a  Qualified  Thrift  Lender to  determine  eligibility  for
Federal Home Loan Bank advances and for certain other purposes.  To qualify as a
Qualified  Thrift  Lender,  a  savings  institution  must  either  qualify  as a
"domestic  building and loan  association"  under the  Internal  Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined to include total assets less intangibles,  value of
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets.  Qualified Thrift Investments  consist
of (i) loans,  equity positions or securities  related to domestic,  residential
real estate or manufactured housing, and educational,  small business and credit
card loans, (ii) 50% of the dollar amount of residential  mortgage loans subject
to sale under certain conditions,  and (iii) stock issued by a Federal Home Loan
Bank. Subject to a 20% of portfolio assets limit,  savings institutions are able
to treat as Qualified Thrift  Investments 200% of their  investments in loans to
finance "starter homes" and loans for  construction,  development or improvement
of housing and community service facilities or for financing small businesses in
"credit-needy"  areas. To be qualified as a Qualified  Thrift Lender,  a savings
institution  must maintain its status as a Qualified  Thrift Lender for nine out
of every 12 months. Failure to qualify as a Qualified Thrift Lender results in a
number of sanctions,  including the imposition of certain operating restrictions
imposed on national banks.  Upon failure to qualify as a Qualified Thrift Lender
for two years, a savings institution must convert to a commercial bank.


                                       25
<PAGE>

     A savings  institution  that does not meet the Qualified Thrift Lender test
must either convert to a bank charter or comply with the following  restrictions
on its  operations:  (i) the  institution  may not engage in any new activity or
make any new  investment,  directly  or  indirectly,  unless  such  activity  or
investment is permissible for a national bank; (ii) the branching  powers of the
institution  shall be restricted to those of a national  bank; and (iii) payment
of dividends by the institution  shall be subject to the rules regarding payment
of dividends by a national  bank.  Upon the  expiration  of three years from the
date the institution  ceases to be a Qualified Thrift Lender,  it must cease any
activity,  and not retain any investment not permissible for a national bank and
savings association.

     REGULATORY  CAPITAL  REQUIREMENTS.  Under OTS  capital  standards,  savings
institutions must maintain "tangible" capital equal to at least 1.5% of tangible
assets,  "core"  capital equal to at least 4.0% (or 3.0% if the  institution  is
rated CAMELS 1 under the OTS examination rating system) of adjusted total assets
and "total" capital (a combination of core and "supplementary" capital) equal to
at least 8.0% of "risk-weighted" assets. In addition, the OTS regulations impose
certain  restrictions on institutions that have a total risk-based capital ratio
that is less than  8.0%,  a ratio of Tier 1 capital to  risk-weighted  assets of
less than 4.0% or a ratio of Tier 1 capital  to  adjusted  total  assets of less
than  4.0%  (or  3.0%  if the  institution  is  rated  CAMELS  1  under  the OTS
examination rating system).  For purposes of these  regulations,  Tier 1 capital
has the same definition as core capital.  See " -- Prompt Corrective  Regulatory
Action."  Core  capital  is defined as common  stockholders'  equity  (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority  interests in the equity accounts of fully  consolidated  subsidiaries,
certain  nonwithdrawable  accounts and pledged savings  deposits and "qualifying
supervisory  goodwill."  Core capital is  generally  reduced by the amount of an
institution's  intangible assets for which no market exists.  Limited exceptions
to the  deduction  of  intangible  assets are provided  for  purchased  mortgage
servicing rights and qualifying supervisory goodwill.  Tangible capital is given
the same  definition  as core  capital,  but does not include an  exception  for
qualifying  supervisory goodwill and is reduced by the amount of all the savings
institution's  intangible  assets with only a limited  exception  for  purchased
mortgage servicing rights.

     Both core and tangible  capital are further reduced by an amount equal to a
savings  institution's  debt and equity  investments in subsidiaries  engaged in
activities not permissible to national banks (other than subsidiaries engaged in
activities  undertaken as agent for customers or in mortgage banking  activities
and depository  institutions or their holding  companies).  As of June 30, 2003,
the Bank had $261,740 investments in, or extensions of credit to, non-includable
subsidiaries.

     Adjusted  total  assets  are  a  savings   institution's  total  assets  as
determined under accounting  principles  generally accepted in the United States
of America,  increased by certain goodwill amounts and by a pro rated portion of
the assets of  unconsolidated  includable  subsidiaries in which the institution
holds a minority  interest.  Adjusted  total assets are reduced by the amount of
assets  that  have  been  deducted  from  capital,  the  savings   institution's
investments in unconsolidated includable subsidiaries,  and, for purposes of the
core capital requirement, qualifying supervisory goodwill.

     In  determining  compliance  with the  risk-based  capital  requirement,  a
savings  institution  is  allowed  to use both core  capital  and  supplementary
capital  provided the amount of  supplementary  capital used does not exceed the
institution's core capital.  Supplementary capital is defined to include certain
preferred stock issues,  nonwithdrawable  accounts and pledged savings  deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other  capital  instruments,  a portion of the  institution's  general loan loss
allowances and up to 45% of unrealized  gains on equity  securities.  Total core
and supplementary  capital are reduced by the amount of capital instruments held
by other depository  institutions pursuant to reciprocal arrangements and equity
investments  other than those deducted from core and tangible  capital.  At June
30, 2003, the Bank has $261,740 in equity  investments for which OTS regulations
require a deduction from total capital.

     The  risk-based  capital  requirement  is  measured  against  risk-weighted
assets,  which equal the sum of each asset and the  credit-equivalent  amount of
each  off-balance  sheet item after being multiplied by an assigned risk weight.
Under the OTS risk-weighting system, one-to-four family first mortgages not more
than 90 days past due with  loan-to-value  ratios  under 80% and average  annual
occupancy  rates  of  at  least  80%  and  certain   qualifying  loans  for  the
construction of one-to-four  family  residences  pre-sold to home purchasers are
assigned a risk weight of 50%. Consumer and residential  construction  loans are
assigned  a risk  weight  of 100%.  Mortgage-backed  securities  issued


                                       26
<PAGE>

or fully  guaranteed  as to  principal  and  interest,  by the FNMA or FHLMC are
assigned a 20% risk weight.  Cash and U.S.  Government  securities backed by the
full faith and credit of the U.S. Government (such as mortgage-backed securities
issued by GNMA) are given a 0% risk weight.

     The table below  presents the capital  position of the Bank relative to its
various regulatory capital requirements at June 30, 2003.

<TABLE>
<CAPTION>
                                                                                      Percent of
                                                                   Amount              Assets(1)
                             (Dollars in thousands)

<S>                                                             <C>                      <C>
             Tangible capital...............................    $  23,056                9.39%
             Tangible capital requirement...................        3,683                1.50
                                                                  -------              ------
                Excess......................................    $  19,373                7.89%
                                                                  =======              ======

             Core capital...................................    $  23,056                9.39%
             Core capital requirement.......................        9,821                4.00
                                                                  -------              ------
                Excess......................................    $  13,235                5.39%
                                                                  =======              ======

             Total capital..................................    $  24,459               21.83%
             Risk-based capital requirement.................        8,962                8.00
                                                                  -------              ------
                Excess.....................................     $  15,497               13.83%
                                                                  =======              ======
</TABLE>

     (1)  Based on adjusted  total assets for  purposes of the tangible  capital
          and core capital  requirements and risk-weighted assets for purpose of
          the risk-based capital requirement.

     In addition to requiring generally applicable capital standards for savings
institutions,  the Director of the OTS is  authorized  to establish  the minimum
level of capital  for a savings  institution  at such amount or at such ratio of
capital-to-assets  as the Director determines to be necessary or appropriate for
such  institution in light of the particular  circumstances  of the institution.
Such  circumstances  would  include a high degree of  exposure of interest  rate
risk,  prepayment risk, credit risk and concentration of credit risk and certain
risks  arising  from  non-traditional  activities.  The  Director  may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound  practice and may issue a directive  requiring  any savings
institution  which  fails to  maintain  capital  at or above the  minimum  level
required by the Director to submit and adhere to a plan for increasing  capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.

     DEPOSIT  INSURANCE.  The Bank is  required  to pay  assessments  based on a
percentage  of its insured  savings  deposits to the FDIC for  insurance  of its
savings deposits by the SAIF. Under the Federal Deposit  Insurance Act, the FDIC
is required to set semi-annual  assessments for  SAIF-insured  institutions at a
level necessary to maintain the designated reserve ratio of the SAIF at 1.25% of
estimated  insured  savings  deposits  or at a higher  percentage  of  estimated
insured savings  deposits that the FDIC determines to be justified for that year
by circumstances  indicating a significant risk of substantial  future losses to
the SAIF. Under the FDIC's risk-based  deposit insurance  assessment system, the
assessment rate for an insured depository  institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the  institution's  capital level and supervisory  evaluations.  Based on the
data reported to regulators  for the date closest to the last day of the seventh
month preceding the semi-annual assessment period,  institutions are assigned to
one of three  capital  groups -- well  capitalized,  adequately  capitalized  or
undercapitalized  --  using  the  same  percentage  criteria  as in  the  prompt
corrective action  regulations.  See "-- Prompt Corrective  Regulatory  Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other  information  as the FDIC  determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor  weaknesses.  Subgroup B consists of institutions  that  demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the  institution  and  increased  risk of loss to the  deposit  insurance  fund.
Subgroup C consists of institutions that pose a substantial  probability of loss
to the deposit insurance fund unless effective corrective action is taken.


                                       27
<PAGE>

     The SAIF deposit insurance assessment rates set by the FDIC range from zero
for "well  capitalized"  institutions  with the highest  supervisory  ratings to
0.27% of insured savings  deposits for  institutions  in the highest  risk-based
premium  category.  In addition,  FDIC-insured  institutions are required to pay
assessments  to the FDIC to help fund interest  payments on certain bonds issued
by the  Financing  Corporation  ("FICO"),  an agency of the  federal  government
established to finance takeovers of insolvent thrifts.  Until December 31, 1999,
SAIF-insured  institutions  were required to pay FICO  assessments at five times
the rate at which Bank  Insurance  Fund  ("BIF")  members were  assessed.  Since
December 31, 1999, both BIF and SAIF members have been assessed at the same rate
for FICO payments.

     The  FDIC  has  adopted  a  regulation  which  provides  that  any  insured
depository  institution  with a ratio of Tier 1 capital to total  assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition,  which
would constitute  grounds for the initiation of termination of deposit insurance
proceedings.  The FDIC,  however,  would not initiate  termination  of insurance
proceedings if the depository  institution has entered into and is in compliance
with a written agreement with its primary regulator,  and the FDIC is a party to
the  agreement,  to increase  its Tier 1 capital to such level as the FDIC deems
appropriate.  Tier 1  capital  is  defined  as the sum of  common  stockholders'
equity,  noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other  than  mortgage  servicing  rights  and  qualifying  supervisory  goodwill
eligible  for  inclusion  in  core  capital  under  OTS  regulations  and  minus
identified losses and investments in certain  securities  subsidiaries.  Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets  may also be deemed to be  operating  in an unsafe or  unsound  condition
notwithstanding  such capital  level.  The regulation  further  provides that in
considering  applications that must be submitted to it by savings  institutions,
the FDIC will take into account whether the institution is meeting with the Tier
1 capital  requirement for state  non-member banks of 4% of total assets for all
but the most highly rated state non-member banks.

     FEDERAL  RESERVE  SYSTEM.  Pursuant to regulations  of the Federal  Reserve
Board,  all  FDIC-insured  depository  institutions  must maintain average daily
reserves equal to 3% on transaction  accounts of up to $41.3 million plus 10% on
the remainder.  This  percentage is subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a  noninterest-bearing  account at a Federal  Reserve Bank, the effect of the
reserve   requirement   is  to   reduce   the   amount   of  the   institution's
interest-earning assets.

     DIVIDEND RESTRICTIONS.  Under OTS regulations, the Bank is not permitted to
pay  dividends on its capital stock if its  regulatory  capital would thereby be
reduced below the amount then required for the liquidation  account  established
for the benefit of certain depositors of the Bank at the time of the Conversion.
In addition,  the Bank is required by OTS  regulations  to give the OTS 30 days'
prior notice of any proposed declaration of dividends.

     OTS regulations require that savings  institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution,  (b) the distribution  would result in the retirement of
any of the  institution's  common  or  preferred  stock or debt  counted  as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A  savings  institution  must  make  application  to the  OTS  to pay a  capital
distribution  if  (x)  the  institution  would  not  be  adequately  capitalized
following the distribution,  (y) the institution's  total  distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution  would  otherwise  violate  applicable  law  or  regulation  or  an
agreement  with  or  condition  imposed  by the  OTS.  If  neither  the  savings
institution  nor the proposed  capital  distribution  meet any of the  foregoing
criteria,  then no notice or  application  is  required to be filed with the OTS
before making a capital  distribution.  The OTS may disapprove or deny a capital
distribution  if in  the  view  of  the  OTS,  the  capital  distribution  would
constitute an unsafe or unsound practice.

     Under the OTS  prompt  corrective  action  regulations,  the Bank  would be
prohibited  from  making  any  capital   distributions   if,  after  making  the
distribution,  it would have: (i) a total risk-based  capital ratio of less than
8.0%; (ii) a Tier 1 risk-based  capital ratio of less than 4.0%; or (iii) a Tier
1 (core) capital ratio of less than 4.0%. See " -- Prompt Corrective  Regulatory
Action."  The OTS,  after  consultation  with the FDIC,  however,  may permit an
otherwise prohibited stock repurchase if made in connection with the issuance of
additional  shares in an equivalent


                                       28
<PAGE>

amount and the repurchase will reduce the institution's financial obligations or
otherwise improve the institution's financial condition.

     In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves  and deducted for federal  income tax  purposes are not  available  for
payment of cash dividends or other  distributions to Bancshares  without payment
of taxes at the then current tax rate on the amount of earnings removed from the
reserves for such  distributions.  See  "Federal  Income  Taxation."  Bancshares
intends to make full use of this  favorable tax treatment  afforded to the Bank,
and does not  contemplate use of any  post-Conversion  earnings of the Bank in a
manner  which would limit the Bank's bad debt  deduction  or create  federal tax
liabilities.

     TRANSACTIONS   WITH   RELATED   PARTIES.   Transactions   between   savings
institutions  and any  affiliate  are  governed by  Sections  23A and 23B of the
Federal  Reserve Act. An affiliate  of a savings  institution  is any company or
entity which  controls,  is  controlled  by or is under common  control with the
institution.  In a holding  company  context,  the parent holding  company of an
institution  (such as Bancshares) and any companies which are controlled by such
parent  holding  company are affiliates of the savings  institution.  Generally,
Sections  23A and 23B (i) limit the extent to which the savings  institution  or
its subsidiaries may engage in "covered  transactions" with any one affiliate to
an amount equal to 10% of such  institution's  capital  stock and  surplus,  and
contain an aggregate  limit on all such  transactions  with all affiliates to an
amount equal to 20% of such capital stock and surplus, and (ii) require that all
such transactions be on terms  substantially the same, or at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate.  The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee  and  similar  other  types of  transactions.  In addition to the
restrictions  imposed by Sections  23A and 23B, no savings  institution  may (i)
loan or otherwise extend credit to an affiliate,  except for any affiliate which
engages only in activities which are permissible for bank holding companies,  or
(ii)  purchase  or invest in any  stocks,  bonds,  debentures,  notes or similar
obligations of any affiliate,  except for affiliates  which are  subsidiaries of
the  savings  institution.  Section  106 of the Bank  Holding  Company Act which
applies to the Bank, prohibits the Bank from extending credit to or offering any
other  services,  or fixing or varying the  consideration  for such extension of
credit or service,  on the condition  that the customer  obtain some  additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.

     LOANS  TO  DIRECTORS,   EXECUTIVE  OFFICERS  AND  PRINCIPAL   STOCKHOLDERS.
Depository  institutions  like the Bank are  also  subject  to the  restrictions
contained in Section 22(h) and Section 22(g) of the Federal Reserve Act on loans
to executive  officers,  directors  and  principal  stockholders.  Under Section
22(h),  loans  to a  director,  executive  officer  and to a  greater  than  10%
stockholder of a depository institution and certain affiliated interests of such
persons,  may not  exceed,  together  with all other  outstanding  loans to such
person and affiliated interests, the institution's  loans-to-one-borrower  limit
(generally equal to 15% of the institution's unimpaired capital and surplus plus
an additional 10% of such capital and surplus for loans fully  collateralized by
certain readily marketable capital).  Section 22(h) also prohibits the making of
loans above amounts  prescribed by the appropriate  federal  banking agency,  to
directors,   executive   officers  and  greater  than  10%  stockholders  of  an
institution,  and their respective  affiliates,  unless such loan is approved in
advance by a majority  of the board of  directors  of the  institution  with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which  includes all other  outstanding  loans to
such  person) as to which such prior board of  director  approval is required as
being the  greater of $25,000 or 5% of capital  and  surplus  (up to  $500,000).
Further, Section 22(h) requires that loans to directors,  executive officers and
principal  stockholders  be made on terms  substantially  the same as offered in
comparable transactions to other persons. Section 22(h) also generally prohibits
a depository  institution  from paying the  overdrafts  of any of its  executive
officers or directors.

     Section  22(g) of the Federal  Reserve Act requires that loans to executive
officers of depository  institutions  not be made on terms more  favorable  than
those  afforded to other  borrowers,  requires  approval for such  extensions of
credit by the board of directors  of a the  institution,  and imposes  reporting
requirements  for and additional  restrictions on the type,  amount and terms of
credits to such officers.  In addition,  Section 106 of the Bank Holding Company
Act prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a  correspondent  banking  relationship  with the  institution,  unless such
extension of credit is on  substantially  the same terms as those  prevailing at
the time for  comparable


                                       29
<PAGE>

transactions  with other  persons and does not involve more than the normal risk
of repayment or present other unfavorable features.

     PROMPT CORRECTIVE  REGULATORY  ACTION.  Under the Federal Deposit Insurance
Corporation  Improvement Act of 1991 ("FDICIA"),  the federal banking regulators
are required to take prompt corrective action if an institution fails to satisfy
certain  minimum capital  requirements.  All  institutions,  regardless of their
capital levels,  are restricted  from making any capital  distribution or paying
any management fees that would cause the institution to become undercapitalized.
An  institution  that fails to meet the minimum  level for any relevant  capital
measure  (an  "undercapitalized  institution")  generally  is:  (i)  subject  to
increased monitoring by the appropriate federal banking regulator; (ii) required
to submit an acceptable  capital  restoration plan within 45 days; (iii) subject
to asset growth limits;  and (iv) required to obtain prior  regulatory  approval
for acquisitions, branching and new lines of businesses. The capital restoration
plan must  include a guarantee  by the  institution's  holding  company that the
institution  will comply with the plan until it has been adequately  capitalized
on average for four consecutive quarters,  under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the  institution  into capital  compliance  as of the date it
failed  to  comply  with  its  capital   restoration   plan.  A   "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
does not  submit an  acceptable  capital  restoration  plan,  may be  subject to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations  on interest  rates paid on savings
deposits,  asset growth and other activities,  possible replacement of directors
and officers,  and  restrictions  on capital  distributions  by any bank holding
company controlling the institution. Any company controlling the institution may
also be required to divest the institution or the institution  could be required
to  divest  subsidiaries.  The  senior  executive  officers  of a  significantly
undercapitalized   institution   may  not  receive   bonuses  or   increases  in
compensation  without prior  approval and the  institution  is  prohibited  from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such actions are  necessary  to carry out the purposes of the prompt  corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below the "critical  capital  level," the  institution  will be subject to
conservatorship or receivership within specified time periods.

     Under the regulations jointly adopted by the federal banking regulators,  a
savings  institution's  capital  adequacy  for  purposes  of the  FDICIA  prompt
corrective  action rules is determined on the basis of the  institution's  total
risk-based  capital  ratio  (the  ratio of its total  capital  to  risk-weighted
assets),  Tier 1  risk-based  capital  ratio (the  ratio of its core  capital to
risk-weighted  assets)  and  leverage  ratio  (the  ratio  of its Tier 1 or core
capital to adjusted total assets).

     The following  table shows the capital ratio  requirements  for each prompt
corrective action category:

<TABLE>
<CAPTION>
                                                     Adequately                                 Significantly
                               Well Capitalized      Capitalized       Undercapitalized       Undercapitalized
                               ----------------      -----------       ----------------       ----------------
        <S>                      <C>                 <C>                 <C>                    <C>
         Total risk-based
           capital ratio        10.0% or more       8.0% or more        Less than 8.0%         Less than 6.0%
         Tier 1 risk-based
           capital ratio         6.0% or more       4.0% or more        Less than 4.0%         Less than 3.0%
         Leverage ratio          5.0% or more       4.0% or more*       Less than 4.0%*        Less than 3.0%
</TABLE>
        ----------
        * 3.0% if the institution has a composite 1 CAMELS rating.

     A  "critically  undercapitalized"  savings  institution  is  defined  as an
institution  that has a ratio of "tangible  equity" to total assets of less than
2.0%.  Tangible  equity is defined as core  capital  plus  cumulative  perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory  goodwill and certain purchased  mortgage  servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately  capitalized
and may require an adequately  capitalized  or  undercapitalized  institution to
comply with the supervisory actions applicable to institutions in the next lower
capital  category  (but  may not  reclassify  a  significantly  undercapitalized
institution as  critically-undercapitalized) if the OTS determines, after notice
and an opportunity for


                                       30
<PAGE>

a hearing,  that the savings institution is in an unsafe or unsound condition or
that the  institution  has received and not  corrected a  less-than-satisfactory
rating for any CAMELS rating category. For information regarding the position of
the Bank with respect to the FDICIA prompt  corrective action rules, see Note 16
of Notes to Consolidated Financial Statements included under Item 8 hereof.

     SAFETY AND SOUNDNESS  GUIDELINES.  Under  FDICIA,  as amended by the Riegle
Community  Development and Regulatory  Improvement Act of 1994 (the "CDRI Act"),
each  federal  banking  agency is required  to  establish  safety and  soundness
standards for  institutions  under its authority.  On July 10, 1995, the federal
banking  agencies,  including  the  OTS  and  Federal  Reserve  Board,  released
Interagency  Guidelines  Establishing  Standards  for Safety and  Soundness  and
published  a final rule  establishing  deadlines  for  submission  and review of
safety and soundness  compliance  plans.  The final rule and the guidelines went
into effect on August 9, 1995. The guidelines require depository institutions to
maintain  internal  controls and information  systems and internal audit systems
that are  appropriate  for the  size,  nature  and  scope  of the  institution's
business.  The  guidelines  also  establish  certain  basic  standards  for loan
documentation,  credit  underwriting,  interest  rate risk  exposure,  and asset
growth.  The guidelines  further  provide that  depository  institutions  should
maintain  safeguards to prevent the payment of  compensation,  fees and benefits
that are  excessive or that could lead to material  financial  loss,  and should
take  into  account  factors  such  as  comparable   compensation  practices  at
comparable  institutions.  If the appropriate  federal banking agency determines
that a depository institution is not in compliance with the safety and soundness
guidelines,  it may  require the  institution  to submit an  acceptable  plan to
achieve compliance with the guidelines.  A depository institution must submit an
acceptable  compliance plan to its primary federal  regulator  within 30 days of
receipt  of a  request  for  such a plan.  Failure  to  submit  or  implement  a
compliance plan may subject the institution to regulatory sanctions.  Management
believes that the Bank already meets  substantially all the standards adopted in
the interagency  guidelines,  and therefore does not believe that implementation
of these regulatory standards will materially affect the Bank's operations.

     Additionally,  the federal banking agencies,  including the OTS and Federal
Reserve Board,  have issued  guidelines  relating to asset quality and earnings.
Under the guidelines,  an FDIC insured  depository  institution  should maintain
systems,  commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent  deterioration in those assets as well as
to evaluate and monitor  earnings and ensure that  earnings  are  sufficient  to
maintain  adequate  capital and  reserves.  Management  believes  that the asset
quality and  earnings  standards  will not have a material  effect on the Bank's
operations.

     FINANCIAL MODERNIZATION LEGISLATION.  On November 12, 1999, legislation was
enacted  which  could  have a  far-reaching  impact  on the  financial  services
industry. The Gramm-Leach-Bliley  ("G-L-B") Act authorizes  affiliations between
banking,  securities and insurance firms and authorizes  bank holding  companies
and national banks to engage in a variety of new financial activities. Among the
new activities  that will be permitted to bank holding  companies are securities
and insurance brokerage,  securities  underwriting,  insurance  underwriting and
merchant banking.  The Federal Reserve Board, in consultation with the Secretary
of the Treasury,  may approve additional  financial  activities.  The G-L-B Act,
however,  prohibits  future  acquisitions  of existing  unitary savings and loan
holding  companies,  like the Company,  by firms which are engaged in commercial
activities and limits the permissible  activities of unitary  holding  companies
formed after May 4, 1999.

     The G-L-B Act imposes  new  requirements  on  financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six  months of  enactment.  The  privacy  provisions  became
effective in July 2001.

     The G-L-B Act contains significant  revisions to the FHLB System. The G-L-B
Act imposes new capital  requirements  on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and


                                       31
<PAGE>

redemption requirements.  The G-L-B Act deletes the current requirement that the
FHLBs  annually  contribute  $300 million to pay interest on certain  government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible  uses of FHLB advances by community  financial  institutions  (under
$500  million in assets) to include  funding  loans to small  businesses,  small
farms and small  agri-businesses.  The  G-L-B Act makes  membership  in the FHLB
voluntary for federal savings associations.

     The  G-L-B  Act  contains  a  variety  of  other  provisions   including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The  Company  is  unable  to  predict  the  impact  of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
with which may acquire  control of the Company,  it may facilitate  affiliations
with companies in the financial services industry.

     PATRIOT  ACT.  The  Patriot  Act  is  intended  to   strengthen   U.S.  law
enforcement's and the intelligence  communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial  institutions  of all kinds is  significant  and wide ranging.  The
Patriot Act contains sweeping anti-money  laundering and financial  transparency
laws and imposes various  regulations  including  standards for verifying client
identification  at  account  opening,  and rules to  promote  cooperation  among
financial  institutions,  regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.

REGULATION OF BANCSHARES

     GENERAL. Bancshares is a savings and loan holding company as defined by the
Home Owners' Loan Act. As such, it is registered  with the OTS and is subject to
OTS  regulation,  examination,  supervision  and  reporting  requirements.  As a
subsidiary  of a savings  institution  holding  company,  the Bank is subject to
certain  restrictions  in its dealings with  Bancshares and affiliates  thereof.
Bancshares also is required to file certain  reports with, and otherwise  comply
with the rules and  regulations  of,  the  Securities  and  Exchange  Commission
("SEC") under the federal securities laws.

     ACTIVITIES  RESTRICTIONS.  The Board of Directors of  Bancshares  presently
intends to continue  operating as a unitary  savings and loan  holding  company.
There are generally no  restrictions  on the activities of a unitary savings and
loan holding company.  However, if the Director of the OTS determines that there
is  reasonable  cause to believe  that the  continuation  by a savings  and loan
holding  company of an  activity  constitutes  a serious  risk to the  financial
safety,  soundness or  stability  of its  subsidiary  savings  institution,  the
Director of the OTS may impose such  restrictions as deemed necessary to address
such  risk  including  limiting:   (i)  payment  of  dividends  by  the  savings
institution;   (ii)  transactions   between  the  savings  institution  and  its
affiliates;  and (iii) any  activities  of the  savings  institution  that might
create a serious  risk  that the  liabilities  of the  holding  company  and its
affiliates may be imposed on the savings institution.  Notwithstanding the above
rules as to  permissible  business  activities  of unitary  savings  institution
holding  companies,  if the  savings  institution  subsidiary  of such a holding
company fails to meet the QTL test, then such unitary holding company shall also
presently become subject to the activities  restrictions  applicable to multiple
holding  companies  and,  unless the savings  institution  requalifies  as a QTL
within one year thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "--Regulation of the Bank -- Qualified
Thrift Lender Test."

     If Bancshares were to acquire control of another savings institution, other
than through  merger or other  business  combination  with the Bank,  Bancshares
would thereupon become a multiple savings and loan holding company. Except where
such  acquisition  is  pursuant to the  authority  to approve  emergency  thrift
acquisitions and where each subsidiary  savings  institution meets the QTL test,
the activities of Bancshares and any of its subsidiaries (other than the Bank or
other subsidiary  savings  institutions)  would thereafter be subject to further
restrictions.


                                       32
<PAGE>

Among other things,  no multiple  savings and loan holding company or subsidiary
thereof  which is not an  institution  shall  commence or continue for a limited
period of time after becoming a multiple savings  institution holding company or
subsidiary  thereof,  any  business  activity,  upon  prior  notice  to,  and no
objection by, the OTS,  other than:  (i)  furnishing  or  performing  management
services for a subsidiary  savings  institution;  (ii)  conducting  an insurance
agency or escrow business; (iii) holding,  managing, or liquidating assets owned
by or acquired from a subsidiary savings  institution;  (iv) holding or managing
properties used or occupied by a subsidiary savings  institution;  (v) acting as
trustee under deeds of trust; (vi) those activities  authorized by regulation as
of March 5, 1987,  to be  engaged in by  multiple  holding  companies;  or (vii)
unless the Director of the OTS by regulation prohibits or limits such activities
for savings and loan  holding  companies,  those  activities  authorized  by the
Federal  Reserve Board as  permissible  for bank holding  companies.  A multiple
savings and loan  holding  company  must obtain the approval of the OTS prior to
engaging in the activities described in (vii) above.

     RESTRICTIONS ON  ACQUISITIONS.  Savings and loan holding  companies may not
acquire,  without prior  approval of the Director of the OTS, (i) control of any
other savings  institution or savings and loan holding company or  substantially
all  the  assets  thereof,  or (ii)  more  than 5% of the  voting  shares  of an
institution or holding company thereof which is not a subsidiary.  Under certain
circumstances,  a registered  savings and loan  holding  company is permitted to
acquire,  with the  approval of the Director of the OTS, up to 15% of the voting
shares of an  under-capitalized  savings  institution  pursuant to a  "qualified
stock issuance" without that savings  institution being deemed controlled by the
holding  company.  In order for the shares  acquired to  constitute a "qualified
stock  issuance,"  the shares  must  consist  of  previously  unissued  stock or
treasury  shares,  the shares  must be acquired  for cash,  the savings and loan
holding  company's other  subsidiaries  must have tangible capital of at least 6
1/2% of total assets, there must not be more than one common director or officer
between  the  savings  and  loan  holding   company  and  the  issuing   savings
institution,  and transactions  between the savings  institution and the savings
and loan holding  company and any of its affiliates must conform to Sections 23A
and 23B of the  Federal  Reserve  Act.  Except  with the prior  approval  of the
Director of the OTS, no director or officer of an institution holding company or
person  owning  or  controlling  by proxy  or  otherwise  more  than 25% of such
company's stock, may also acquire control of any savings institution, other than
a  subsidiary  savings  institution,  or of any other  savings and loan  holding
company.

     The  Director of the OTS may only  approve  acquisitions  resulting  in the
formation of a multiple  savings and loan holding company which controls savings
institutions  in more than one  state  if:  (i) the  multiple  savings  and loan
holding company involved controls an institution which operated a home or branch
office in the state of the  institution to be acquired as of March 5, 1987; (ii)
the  acquiror  is  authorized  to  acquire  control of the  savings  institution
pursuant to the emergency  acquisition  provisions of the FDIC Act; or (iii) the
statutes  of the  state in which  the  institution  to be  acquired  is  located
specifically permit institutions to be acquired by state-chartered  institutions
or savings and loan holding  companies  located in the state where the acquiring
entity is located (or by a holding  company that controls  such  state-chartered
savings institutions).

     OTS regulations permit federal savings  institutions to branch in any state
or states of the United States and its territories.  Except in supervisory cases
or when  interstate  branching  is  otherwise  permitted  by state  law or other
statutory  provision,  a federal  institution  may not establish an out-of-state
branch unless (i) the federal  institution  qualifies as a QTL or as a "domestic
building and loan  association"  under  7701(a)(19) of the Internal Revenue Code
and the total  assets  attributable  to all branches of the  institution  in the
state would qualify such branches  taken as a whole for treatment as a QTL or as
a domestic  building and loan  association and (ii) such branch would not result
in (a) formation of a prohibited  multi-state  multiple savings and loan holding
company or (b) a violation  of certain  statutory  restrictions  on branching by
savings institution  subsidiaries of banking holding companies.  Federal savings
institutions  generally may not establish  new branches  unless the  institution
meets or exceeds  minimum  regulatory  capital  requirements.  The OTS will also
consider the institution's record of compliance with the Community  Reinvestment
Act of 1977 in connection with any branch application.

     FEDERAL SECURITIES LAW. Bancshares' Common Stock is registered with the SEC
under the  Securities  Exchange Act of 1934,  as amended  ("Securities  Exchange
Act").  Bancshares is subject to the information,  proxy  solicitation,  insider
trading restrictions and other requirements of the Securities Exchange Act.


                                       33
<PAGE>

     SARBANES-OXLEY  ACT OF 2002. On July 30, 2002,  the  Sarbanes-Oxley  Act of
2002 ("SOX") was signed into law which mandated a variety of reforms intended to
address corporate and accounting fraud. SOX contains  provisions which amend the
Securities  Exchange Act of 1934,  as amended (the "Act") and  provisions  which
directed the Securities and Exchange Commission (the "SEC") to promulgate rules.
The Act  provides  for the  establishment  of a new  Public  Company  Accounting
Oversight  Board  ("PCAOB"),  which will enforce  auditing,  quality control and
independence  standards for firms that audit public reporting companies and will
be funded by fees from all public  reporting  companies.  The Act imposes higher
standards  for  auditor  independence  and  restricts  provision  of  consulting
services by auditing firms to companies they audit. Any non-audit services being
provided to an audit  client will require  preapproval  by the  Company's  audit
committee  members.  In  addition,   certain  audit  partners  must  be  rotated
periodically.  The Act requires  chief  executive  officers and chief  financial
officers,  or their  equivalent,  to certify to the accuracy of periodic reports
filed with the SEC, subject to civil and criminal penalties if they knowingly or
willfully violate this certification  requirement.  In addition,  under the Act,
counsel  will be required  to report  evidence  of a material  violation  of the
securities  laws or a  breach  of  fiduciary  duty  by a  company  to its  chief
executive  officer or its chief legal  officer,  and, if such  officer  does not
appropriately  respond,  to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.

     Longer  prison  terms  will also be  applied to  corporate  executives  who
violate federal  securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended,  and bonuses
issued  to  top  executives  prior  to  restatement  of  a  company's  financial
statements  are now  subject  to  disgorgement  if such  restatement  was due to
corporate  misconduct.  Executives  are  also  prohibited  from  trading  during
retirement  plan  "blackout"  periods,  and  loans  to  company  executives  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited in a fund for the benefit of harmed investors. Directors and executive
officers  must also  report  most  changes  in their  ownership  of a  company's
securities  within two business  days of the change,  and as of the end of June,
2003, all ownership reports must be electronically filed.

     The Act also  increases the oversight and authority of audit  committees of
publicly traded  companies.  Audit committee members must be independent and are
barred from accepting  consulting,  advisory or other compensatory fees from the
issuer. In addition, all SEC-reporting  companies must disclose whether at least
one member of the committee is an "audit  committee  financial  expert" (as such
term is  defined  by the SEC rules) and if not,  why not.  Audit  committees  of
publicly  traded  companies  will have authority to retain their own counsel and
other advisors funded by the company. Audit committees must establish procedures
for the receipt,  retention and treatment of complaints regarding accounting and
auditing  matters and  procedures  for  confidential,  anonymous  submission  of
employee concerns regarding  questionable  accounting or auditing matters. It is
the  responsibility  of  the  audit  committee  to  hire,  oversee  and  resolve
disagreements with the Company's independent auditor.

     Beginning  six months  after the SEC  determines  that the PCAOB is able to
carry  out its  functions,  it will be  unlawful  for any  person  that is not a
registered public accounting firm ("RPAF") to audit a public reporting  company.
Under the Act, a RPAF is prohibited from performing  statutorily  mandated audit
services  for a  company  if  such  company's  chief  executive  officer,  chief
financial officer,  comptroller,  chief accounting officer or any person serving
in equivalent  positions has been employed by such firm and  participated in the
audit of such company during the one-year period  preceding the audit initiation
date.  The Act also  prohibits any officer or director of a company or any other
person  acting  under their  direction  from  taking any action to  fraudulently
influence,  coerce,  manipulate or mislead any  independent  public or certified
accountant  engaged in the audit of the Company's  financial  statements for the
purpose of rendering the financial statement's  materially  misleading.  The Act
also  requires the SEC to  prescribe  rules  requiring  inclusion of an internal
control   report  and   assessment   by  management  in  the  annual  report  to
shareholders.  The Act  requires the RPAF that issues the audit report to attest
to and report on management's  assessment of the Company's internal controls. In
addition, the Act requires that each financial report required to be prepared in
accordance with (or reconciled to) generally accepted accounting  principles and
filed  with  the SEC  reflect  all  material  correcting  adjustments  that  are
identified by a RPAF in accordance with generally accepted accounting principles
and the rules and regulations of the SEC.


                                       34
<PAGE>

     Although  the  Company  anticipates  it will  incur  additional  expense in
complying with the provisions of the Act and the related rules,  management does
not expect that such  compliance  will have a material  impact on the  Company's
financial condition or results of operations.

FEDERAL INCOME TAXATION

     Savings  institutions such as the Bank are subject to the provisions of the
Internal  Revenue Code of 1986, as amended (the "Internal  Revenue Code") in the
same general manner as other  corporations.  Through tax years beginning  before
December 31, 1995,  institutions such as the Bank which met certain definitional
tests and other  conditions  prescribed by the Internal  Revenue Code  benefited
from certain favorable provisions regarding their deductions from taxable income
for annual  additions  to their bad debt  reserve.  For purposes of the bad debt
reserve  deduction,  loans are separated into  "qualifying real property loans,"
which generally are loans  collateralized by interests in certain real property,
and  "nonqualifying  loans,"  which are all other  loans.  The bad debt  reserve
deduction  with  respect to  nonqualifying  loans  must be based on actual  loss
experience.  The  amount  of the bad debt  reserve  deduction  with  respect  to
qualifying  real  property  loans was based upon  actual  loss  experience  (the
"experience method") or a percentage of taxable income determined without regard
to such  deduction  (the  "percentage  of  taxable  income  method").  Under the
experience  method,  the bad debt  deduction  for an addition to the reserve for
qualifying  real property loans was an amount  determined  under a formula based
generally on the bad debts actually  sustained by a savings  institution  over a
period of years.  Under the percentage of taxable  income  method,  the bad debt
reserve  deduction for  qualifying  real property  loans was computed as 8% of a
savings  institution's  taxable  income,  with  certain  adjustments.  The  Bank
generally  elected  to use  the  method  which  has  resulted  in  the  greatest
deductions for federal income tax purposes in any given year.

     Legislation  that is effective for tax years  beginning  after December 31,
1995, requires  institutions to recapture into taxable income over a six taxable
year period the portion of the tax loan  reserve  that  exceeds the pre-1988 tax
loan loss reserve.  The Bank will no longer be allowed to use the reserve method
for tax loan loss provisions,  but would be allowed to use the experience method
of accounting  for bad debts.  There will be no future effect on net income from
the  recapture  because the taxes on these bad debt  reserves  have already been
accrued  as a  deferred  tax  liability.  The  regulatory  authorities  have not
examined the Bank's federal income tax returns in the past five years.

     For taxable years beginning after June 30, 1986, the Internal  Revenue Code
imposes an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally  applies  to a  base  of  regular  taxable  income  plus  certain  tax
preferences  ("alternative  minimum taxable income" or "AMTI") and is payable to
the  extent  such AMTI  exceeds  an  exemption  amount.  The other  items of tax
preference that constitute AMTI include (a) tax-exempt  interest on newly-issued
(generally, issued on or after August 8, 1986) private activity bonds other than
certain  qualified  bonds and (b) for taxable years including 1987 through 1989,
50% of the excess of (i) the  taxpayer's  pre-tax  adjusted net book income over
(ii) AMTI  (determined  without  regard to this latter  preference  and prior to
reduction by net operating losses). For taxable years beginning after 1989, this
latter  preference  has  been  replaced  by 75% of the  excess  (if  any) of (i)
adjusted  current  earnings as defined in the Internal  Revenue Code,  over (ii)
AMTI (determined without regard to this preference and prior to reduction by net
operating  losses).  For any taxable year  beginning  after 1986,  net operating
losses  can offset no more than 90% of AMTI.  Certain  payments  of  alternative
minimum taxes may be used as credits  against  regular tax liabilities in future
years.

STATE INCOME TAXATION

     The  Bank  is  subject  to  Arkansas   corporation   income  tax  which  is
approximately  6.5%  of  taxable  earnings.  Bancshares  is  incorporated  under
Oklahoma law and qualified to do business in Arkansas as a foreign  corporation,
and accordingly it incurs certain  franchise and other taxes,  which  management
believes are not material.

EMPLOYEES

     As of June 30, 2003, the Bank had 79 full-time equivalent  employees,  none
of  whom  was  represented  by a  collective  bargaining  agreement.  Management
considers the Bank's relationships with its employees to be good.


                                       35
<PAGE>

ITEM 2.  PROPERTIES
-------------------

     The following table sets forth information  regarding the Bank's offices at
June 30, 2003.

<TABLE>
<CAPTION>
                                  YEAR           OWNED OR                           APPROXIMATE
                                 OPENED           LEASED          BOOK VALUE      SQUARE FOOTAGE
                                 ------           ------          ----------      --------------

Main Office:
<S>                               <C>             <C>            <C>                     <C>
237 Jackson Street, SW            1933               Owned      $   211,361             12,000
Camden, Arkansas

Branch Offices:

4937 Highway 5 North              2000               Owned      $ 1,669,404              6,500
Bryant, Arkansas

1125 Fairview Road, SW
Suite 208                         1981               Owned      $   123,426              1,200
Camden, Arkansas

610 West 4th Street               1969               Owned      $   730,419              3,500
Fordyce, Arkansas

108 South Main                    1996               Owned      $ 1,000,375              5,500
Sheridan, Arkansas

103 Greenfield Drive              2002              Leased      $        --                900
Monticello, Arkansas
</TABLE>


     In addition to the offices described above, at June 30, 2003, the Bank held
four other properties  located in various  communities within the Bank's primary
market area. These properties were acquired for possible future  construction of
additional offices and related  facilities.  At June 30, 2003, the aggregate net
book value of these properties  totaled $653,000 of which none was classified as
held for resale.

     The book value of the Bank's aggregate  investment in properties,  premises
and equipment totaled approximately $5.1 million at June 30, 2003. See Note 7 of
the  Notes  to  Consolidated  Financial  Statements  in  the  Annual  Report  to
Stockholders for June 30, 2003.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     From  time to  time,  the  Bank is a party  to  various  legal  proceedings
incident to its  business.  At June 30, 2003,  except as set forth below,  there
were no legal  proceedings to which the Company was a party,  or to which any of
its property  was  subject,  which were  expected by  management  to result in a
material  loss to the  Company  or Bank.  In  addition,  there  were no  pending
regulatory proceedings to which the Company or the Bank or any of its properties
was a party, which were expected to result in a material loss.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     There were no matters  submitted to a vote of the security  holders  during
the fourth quarter of the fiscal year ended June 30, 2003.


                                       36
<PAGE>

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------

     The  information  contained  under the section "Market for Common Stock and
Related  Stockholder  Matters" in the Annual  Report is  incorporated  herein by
reference.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The  information  contained in the table captioned  "Selected  Consolidated
Financial  and  Other  Data" in the  Annual  Report  is  incorporated  herein by
reference.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------

     The information contained in the section captioned "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------

     The  information  contained in the section  captioned  "Market Risk" in the
Annual Report is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

     The financial  statements  contained in the Annual Report, which are listed
under Item 14 herein, are incorporated herein by reference.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
--------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------

     The  information  required  by this item was  previously  disclosed  in the
Company's  Current  Report on Form 8-K filed with the  Securities  and  Exchange
Commission  (the  "Commission")  on  November  9, 2001 (the "Form  8-K") and the
Company's  Amendment No. 1 to the Form 8-K filed with the Commission on November
13, 2001.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------

     As of the end of the  period  covered  by this  report,  management  of the
Company  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation  of  the  Company's  principal  executive  officer  and  principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures.  Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and  procedures  are  effective  in  ensuring  that  information  required to be
disclosed  by the  Company  in  reports  that it  files  or  submits  under  the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported,  within the time periods  specified in the Securities and Exchange
Commission's rules and forms.

     In addition,  there have been no changes in the Company's  internal control
over financial  reporting (to the extent that elements of internal  control over
financial  reporting are subsumed  within  disclosure  controls and  procedures)
identified in connection  with the evaluation  described in the above  paragraph
that occurred  during the Company's  last fiscal  quarter,  that has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.


                                       37
<PAGE>

PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     For information concerning the Board of Directors and executive officers of
the Company, the information contained under the section captioned "Proposal I -
Election of  Directors"  in the  Company's  definitive  proxy  statement for the
Company's 2003 Annual Meeting of Stockholders (the "Proxy Statement") which will
be filed within 120 days of the  Company's  fiscal year end and is  incorporated
herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     The   information   contained  under  the  sections   captioned   "Director
Compensation"   and  "Executive   Compensation"   in  the  Proxy   Statement  is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     (a)  SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

          Information  required by this item is incorporated herein by reference
          to the  sections  captioned  "Proposal  I - Election of  Directors  --
          Executive  Compensation  -- Securities  Authorized  for Issuance Under
          Equity Compensation Plans" in the Proxy Statement.

     (b)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

          Information  required by this item is incorporated herein by reference
          to the section captioned "Voting Securities and Beneficial  Ownership"
          in the Proxy Statement.

     (c)  CHANGES IN CONTROL

          Management  of the Company  knows of no  arrangements,  including  any
          pledge by any person of  securities  of the Company,  the operation of
          which may at a  subsequent  date  result in a change in control of the
          registrant.

     (d)  EQUITY COMPENSATION PLANS

          The following table sets forth certain information with respect to the
          Company's equity compensation plans:

<TABLE>
<CAPTION>
                             (a)                                (b)                             (c)
                                                                                  NUMBER OF SECURITIES REMAINING
                                                                                    AVAILABLE FOR FUTURE ISSUANCE
                  NUMBER OF SECURITIES TO BE ISSUED   WEIGHTED-AVERAGE EXERCISE      UNDER EQUITY COMPENSATION
                    UPON EXERCISE OF OUTSTANDING           PRICE OF OUTSTANDING       PLANS (EXCLUDING SECURITIES
PLAN CATEGORY       OPTIONS, WARRANTS AND RIGHTS      OPTIONS, WARRANTS AND RIGHTS     REFLECTED IN COLUMN (a))
-------------       ----------------------------      ----------------------------     ------------------------
<S>                            <C>                               <C>                            <C>
Equity compensation
   plans approved by
   security holders            168,387                            $10.47                         23,377

Equity compensation
   plans not approved
   by security holders              --                                --                             --
                               -------                             -----                         ------

     Total                     168,387                            $10.47                         23,377
                               =======                             =====                         ======
</TABLE>


                                       38
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The information  required by this item is incorporated  herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

     (a)  LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
         ----------------------------------------------

     (1)  Financial Statements.  The following consolidated financial statements
          are incorporated by reference from Item 8 hereof:

               Independent Auditors' Reports

               Consolidated  Statements  of  Financial  Condition as of June 30,
               2003 and 2002

               Consolidated  Statements of Income and  Comprehensive  Income for
               the years ended June 30, 2003, 2002 and 2001

               Consolidated  Statements  of  Stockholders'  Equity for the years
               ended June 30, 2003, 2002 and 2001

               Consolidated  Statements  of Cash Flows for the years  ended June
               30, 2003, 2002 and 2001

               Notes to  Consolidated  Financial  Statements for the years ended
               June 30, 2003, 2002 and 2001

     (2)  Financial  Statement  Schedules.  All schedules for which provision is
          made in the  applicable  accounting  regulations of the Securities and
          Exchange  Commission are omitted  because of the absence of conditions
          under which they are required or because the required  information  is
          included in the  Consolidated  Financial  Statements and related Notes
          thereto.

     (3)  Exhibits.  The  following is a list of exhibits  filed as part of this
          Annual Report on Form 10-K and is also the Exhibit Index.

      NO.                           DESCRIPTION
      ---                           -----------

      3.1           Articles of Incorporation of HCB Bancshares, Inc. *

      3.2           Bylaws of HCB Bancshares, Inc. ****

      4             Form of Common Stock Certificate of HCB Bancshares, Inc. *

      10.1          Form of HCB Bancshares, Inc. 1997 Stock Option and Incentive
                    Plan *=

      10.2          Form of HCB Bancshares, Inc. Management Recognition Plan and
                    Trust Agreement *=

      10.3(a)       Employment  Agreements  by and between  Heartland  Community
                    Bank and Vida H. Lampkin and Cameron D. McKeel *=

      10.3(b)       Employment  Agreements by and between HCB  Bancshares,  Inc.
                    and Vida H. Lampkin and Cameron D. McKeel **=

      10.4          Intentionally omitted.


                                       39
<PAGE>

      10.5          Heartland  Community  Bank  Directors'  Retirement  Plan, as
                    amended*=

      10.6(a)       Change-in-Control  Protective  Agreement  between  Heartland
                    Community Bank and Scott A. Swain *****=

      10.6(b)       Change-in-Control    Protective    Agreement   between   HCB
                    Bancshares, Inc. and Scott A. Swain *****=

      10.7(a)       Employment Agreement by and between Heartland Community Bank
                    and Charles Black ******=

      10.7(b)       Employment Agreement by and between HCB Bancshares, Inc. and
                    Charles Black  ******=

      10.8          Standstill Agreement dated August 29, 2001, by and among HCB
                    Bancshares,  Inc.  and  Stilwell  Value  Partners  IV, L.P.,
                    Stilwell  Associates,  L.P.,  Stilwell  Value LLC and Joseph
                    Stilwell***

      10.9          Change-in-Control  Protective  Agreement  between  Heartland
                    Community Bank, HCB Bancshares, Inc. and Paula J. Bergstrom=

      10.10         Change-in-Control  Protective  Agreement  between  Heartland
                    Community Bank, HCB Bancshares, Inc.  and Henry A. Pryor=

      13            Annual Report to Stockholders for the fiscal year ended June
                    30, 2003

      21            Subsidiaries

      23.1          Consent of BKD, LLP

      23.2          Consent of Deloitte & Touche LLP

      31.1          Rule 13a-14(a) Certification of Chief Executive Officer

      31.2          Rule 13a-14(a) Certification of Chief Financial Officer

      32            18 USC Section 1350 Certification

----------
*         Incorporated by reference to the Company's  Registration  Statement on
          Form SB-2 (File No. 333-19093).
**        Incorporated by reference to the Company's  Annual Report on Form 10-K
          for the year ended June 30, 2000 (File No. 0-22423)
***       Incorporated by reference to the Company's  Current Report on Form 8-K
          filed on September 5, 2001 (File No. 0-22423).
****      Incorporated  by reference to the Company's  Quarterly  Report on Form
          10-Q for the quarter ended September 30, 2001 (File No. 0-22423)
*****     Incorporated  by reference to the Company's  Quarterly  Report on Form
          10-Q for the quarter ended December 31, 2001 (File No. 0-22423)
******    Incorporated by reference to the Company's  Annual Report on Form 10-K
          for the year ended June 30, 2002 (File No. 0-22423)
=         Management contract or compensatory plan or arrangement.


                                       40
<PAGE>

     (b) REPORTS ON FORM 8-K. The Company filed the following Current Reports on
Form 8-K during the fourth quarter of the fiscal year ended June 30, 2003:

         DATE OF REPORT        ITEM(S) REPORTED       FINANCIAL STATEMENTS FILED
         --------------        ----------------       --------------------------

         April 22, 2003               7,12                      N/A
         May 22, 2003                 5,7                       N/A

     (c)  EXHIBITS.  The  exhibits  required by Item 601 of  Regulation  S-K are
either  filed as part of this  Annual  Report  on Form 10-K or  incorporated  by
reference herein.

     (d) FINANCIAL  STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT.  There
are no other financial  statements and financial  statement schedules which were
excluded from the Annual Report to Stockholders  pursuant to Rule 14a-3(b) which
are required to be included herein.


                                       41
<PAGE>

                                   SIGNATURES


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      HCB BANCSHARES, INC.


Date: September 25, 2003              By:  /s/ Charles T. Black
                                           -----------------------------------
                                           Charles T. Black
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant in the capacities and on the dates indicated.

By:  /s/ Charles T. Black                                    September 25, 2003
     --------------------------------------------------
       Charles T. Black
       Director, President and Chief Executive Officer
       (Principal Executive Officer)

By:  /s/ Scott A. Swain                                      September 25, 2003
     --------------------------------------------------
       Scott A. Swain
       Senior Vice President and Chief Financial Officer
       (Principal Financial and Accounting Officer)

By:  /s/ Vida H. Lampkin                                     September 25, 2003
     --------------------------------------------------
       Vida H. Lampkin
       Chairman of the Board

By:  /s/ John G. Rich                                        September 25, 2003
     --------------------------------------------------
      John G. Rich
      Director

By:  /s/ Bruce D. Murry                                      September 25, 2003
     --------------------------------------------------
       Bruce D. Murry
       Director

By:  /s/ Carl E. Parker, Jr.                                 September 25, 2003
     --------------------------------------------------
       Carl E. Parker, Jr.
       Director

By:  /s/ F. Michael Akin                                     September 25, 2003
     --------------------------------------------------
       F. Michael Akin
       Director


By:
     --------------------------------------------------
       Clifford Steelman
       Director